“It should not be expected that money will move toward banks as the higher interest rates are insignificant,” ISNA quoted Mohammad Reza Jamshidi as saying.
The MCC, Iran’s top monetary decision-making body, decided on Tuesday to raise interest on one-year maturity deposits by 1 percentage point to 16%.
Likewise, interest on two-year deposits was set at 18%. On short-term deposits with 3-month maturity, the rate increased by 2 percentage points to 12%, the Central Bank of Iran website reported.
MCC approved 14% interest rate for six-month deposits, up 3 percentage points.
The CBI says the decision is in line with efforts “to protect the value of the national currency” and “diversify bank deposits”.
Thanks to the high and mounting money supply directed toward financial markets, forex, gold and share prices have been soaring unprecedentedly.
Observers say investors’ rush into financial markets is indeed a reflection of expectations about future inflation.
Low interest rates have undermined the people’s enthusiasm to keep their money in banks as the national currency tanks and galloping inflation eats away at their rainy-day savings.
Observers say as long as high inflation persists and returns on stocks, gold and forex far outpace the paltry interest rates offered by banks, the subtle increase in interest rates will attract nothing but indifference of the people whose life savings are sinking at terrible speed.
“Galloping inflation is the main snag that has rendered such monetary policies ineffective,” to say the least, Jamshidi concurred.
“As long as price inflation persists, increasing interest rates cannot be effective in alluring unbridled liquidity into banks”.
Market data show that investment in the bourse brought fat profits of more than 250% since the beginning of current fiscal year in March
Returns on investment in the bullion market were around 75% as seen in 78% growth in gold coin prices and a 70% hike in 18-karat gold. Major currencies also jumped against the rial with the dollar up 50% since the beginning of the year, the Persian-language economic newspaper Donya-e-Eqtesad reported.
Stressing that the interest rate per se has not increased significantly compared to past rates, the senior banker said the CBI has only diversified the interest on deposits by adding more deposit contracts.
Under the previous interest rate framework, depositors could keep their money in banks only with one-year and six-month maturity dates. In the new rules, the CBI allows deposits with two-year and three-month maturity.
The new interest rates are the maximum that lenders can offer on deposits because higher rates will significantly increase the cost of money for banks.
Curbing Money Supply
In related news, Payman Qorbani, a CBI vice governor said Wednesday the central bank is working a plan to issue a new type of Islamic bonds, known as “Wadia” to tame money flow.
Little is known about the bond. However as the name suggests (Wadia in Arabic means deposit), it appears that Wadia bonds will be similar to certificate of deposits with the difference being that the latter bears fixed interest rates while in the former people deposit their money with banks to receive the principal on maturity plus an unspecified amount in interest. The interest is not known prior to the contract and is calculated subject to annual inflation.
Qorbani said the CBI plans to issue two-year Wadia bonds with MCC approval.
“Issuing 100 trillion rials [$430 million] in Wadia bonds will cut broad money growth by 2.8 percentage points.”
In a recent report the CBI said money supply had reached 24,721.5 trillion rials ($107 billion) when the fiscal year ended on March 19.
It grew by 5,893.5 trillion rials ($25.5 billion) in three months (to June 21) -- a 31.3% jump and one of the highest in the past five decades.