Central Bank of Iran Signals Interest Rate Hike

EghtesadOnline: The Central Bank of Iran has sent another signal that it is about to raise interest rates. It has allowed banks and credit institutions to renew one-year deposit contracts that had been struck during the 10-day grace period after which the bank lowered the interest rates.

News ID: ۷۸۳۷۷۸

26 August 2018

"Banks and credit institutions are allowed to extend for one more month the deposit contracts that they had signed with customers between Aug. 24, 2017, and Sept. 2, 2017 under the same conditions and only at the request of customers," a statement published on CBI's official website said on Wednesday.

On Aug. 23, 2017, CBI had released a statement saying lenders have an 11-day window to absorb liquidity by signing one-year deposit contracts with rates going higher than the 15% that was legally set by the Money and Credit Council, Iran's highest financial decision-making body, a year before.

That engaged the banking system in a battle for deposits whose maturity periods are due next week, according to Financial Tribune.

Now, the central bank is effectively prolonging the high interest rate deposits for another month. This announcement comes amid months-long speculations that the monetary regulator will be forced to increase deposit rates once again to redirect liquidity toward the banks and out of the fluctuating foreign currency market and other parallel markets that have been rocked in the past few months.

Over the last two weeks, two major banks–the state-run Bank Melli and privatized Tejarat Bank–have been given the go-ahead by CBI to issue certificates of deposit with guaranteed annual yields of 18%.

CBI's statement on Wednesday said the move to extend higher rates for another month is "in line with improving monetary and foreign exchange policies with the aim of stabilizing markets and undergoing a period of transformation in parallel with the implementation of the new foreign currency plan".

The new foreign currency plan was implemented shortly after CBI's new governor, Abdolnasser Hemmati, took over less than two weeks ago. They revolve around promoting a market free of government intervention and are aimed at preventing further depreciation of the rial.

CBI also said on Wednesday it will "undertake measures based on modern instruments and strict supervision over the performance of the banks", without offering details.

High-level officials and many experts said last year that interest rates need to decline to support local production and improve competitiveness. But almost a year after they were forcibly lowered, now it seems that the central bank may be left with little choice but to walk back its decision.

Such a move will not be without precedent either. When the currency crisis began unfolding last winter, CBI allowed the banks to offer CDs with annual yields of 20% for two weeks.