No Interest Rate Cuts Likely Until May

EghtesadOnline: Interest rate cuts will be postponed until after the presidential elections in May, claims a bank chief executive.

News ID: ۷۷۴۰۰۰

17 February 2017

"The case for reducing bank interest rates has been closed in the current administration and it does not seem as if calls by bankers to lower the rates would get anywhere during the tenure of the current government," Mehr News Agency quoted an unnamed bank executive as saying.

Back in June, CEOs of private and state-owned banks agreed to lower long-term deposit rates from 18% to 15% with short-term rates set at approximately 10%. Later, the Money and Credit Council approved the cut.

Central Bank of Iran Governor Valiollah Seif later announced that the central bank seeks single digit interest rates, approximately 2-3% higher than the inflation rate, Financial Tribune reported.

Iran's 2017 presidential elections are scheduled for 10 May in an event that would form the 12th administration after the Islamic Revolution in 1979.

Ali Asghar Mirmohammad-Sadeqi, director of CBI's Credit Department, had announced in December that banks have no plans to lower interest rates at least until the end of the current fiscal year in March, "considering the current state of the economy and the banking sector".

That meant the next feasible time for further rate cuts would be in mid-April, the time MCC usually convenes to decide on interest rates.

Any interest rate cut in Iran has to be decided by MMC, which is headed by the CBI governor, but due to criticisms that imposing rates on bankers is at odds with market dynamisms, the central bank has recently given more rate-setting say to bankers.

The bank has mostly limited its interventions to the inter-bank market.

However, it seems that the interest rates would not be brought down by the current administration.

Cut Disadvantages Banks

Secretary of the Association of Banks and Credit Institutions said another cut in interest rates will be harmful for the banking system since banks will not be able to absorb resources at such low rates.

"Banks cannot absorb resources with an interest rate of 15% when car manufacturers pre-sell their products at a 24-26% interest rate," Mohammad Reza Jamshidi also told IRNA.

He also criticized a parliamentary measure to reduce the interest rate spread by 10 % annually.

Asked why bankers acquiesced to interest rate cuts twice in the past, the official said, "During those discussions, the lending rates were not supposed to decline."

Jamshidi added that the Money and Credit Council was expected to lower interest rates by 2 percentage points, but it suddenly reduced them from 22% to 18%.

Noting that not all the deposits can be allocated as loans, he said 13% of the deposits go to the central bank as reserve requirement, around 2.5% are spent to balance the liquidity of banks and 1.5% is put aside for loan loss provision.

"Banks can only allocate 83% of absorbed resources as loans, so they only gain 14.93% interest while they have to pay 15% interest on savings," he said.

Jamshidi added that overhead expenses, staff salary, tax and consultancy fees must be added to the balance sheet of the banks to show that this reduction in interest rates will only further disadvantage the banks.