Banks Told Not to Raise Interest Rates

EghtesadOnline: The Central Bank of Iran has again called on banks to observe regulations governing interest on deposits.

News ID: ۷۸۷۵۰۲

26 December 2021

Lenders must pay 10%-18% on term deposits as per rules approved by Money and Credit Council, the top monetary and banking decision-making body, the CBI news website said.

“However, it has been seen that some banks and credit institutions pay higher rates on individual deposits,  particularly on money from investment funds,” the CBI noted.

Some banks exploit legal loopholes and offer interest over and above the CBI ceilings, it warned. It did not elaborate on the loopholes nor say how and why banks have the liberty to raise rates that are against the law.

Banks’ temptation to offer higher rates, apparently to lure customers and attract big money, has gained attention in recent weeks.

Earlier in the month the secretary of Iran's Private Banks and Credit Institutions Council Mohammad Reza Jamshidi shared similar concerns.

“CEOs of private banks agreed to comply with rates set by the MCC. Some banks are [already] offering higher rates on term deposits. Further increases obviously will not benefit them," he was quoted as saying by IBENA.

Despite runaway inflation and mounting calls on the CBI for raising interest rates to curb the money supply expolsion, the rates have remained unchanged since July 2020.

The renewed warning reflects concern about the conspicuous impact of high rates on the share market.  The CBI has been resisting demands for higher rates due to its impact on investors’ willingness to invest in the bourse, which has been in dire straits for months.

In July 2020, the MCC allowed lenders to slightly raise interest on term deposits, apparently to try and avoid further depreciation of the national currency.

Iran’s top monetary decision-making body decided to raise rates on one-year maturity deposits by 1 percentage point to 16%. Likewise, interest on two-year deposits was set at 18%. For short-term deposits with 3-month maturity, the rate increased by 2 percentage points to 12%. The MCC approved 14% for six-month deposits, up 3 percentage points.

Interbank Rates in Check

In tandem with controls over rates offered on bank deposits, the CBI is striving to curb interbank lending rates by implementing open market operations.

Interbank rate rose for 14 consecutive weeks to reach 21.09% in late November, the highest in 12 months.

Thanks to the CBI’s expansionary policy and implementation of OMOs, the rising trend was tamed and rates declined slightly on Dec.18 to reach 21.04%. Though, updates by the CBI on Saturday show interbank rates clawed back to 21.08%.

Increase in interbank rates is due to liquidity shortage of banks. To quench banks’ thirst for liquidity, the CBI has been injecting funds in the interbank market in the past eight months under the OMO framework.

Within the OMO framework, banks borrow from the CBI under the so-called structured interbank lending -- a process through which banks put up bonds as collateral with the CBI to be able to borrow.