Governor of the Central Bank of Iran Valiollah Seif announced on Friday that the Money and Credit Council has laid the groundwork for further cuts in the interest rate but said this would be done only in accordance with the rate of inflation and market conditions.
“We are not obliged in any way to cut interest rates but the council is constantly reviewing signals from the market and the inflation rate to make new decisions, which include a cut in interest rates,” Seif said in an exclusive interview with the parliament’s website ICANA.
The council–highest monetary decision-making body—is headed by the governor of the central bank, and includes the minister of economy and lawmakers as members.
The MCC cut the deposit rate ceiling (for one-year deposits) from 22% to 20% in April, following several weeks of heated debates on the issue. It also reduced lending rate ceiling to 24% from 28%.
Although some pundits denounced the decision, mentioning its potential to stoke the recovering inflation rate, others went so far as to say the reduction was not enough to boost business lending.
The ruling also withdrew criticism for being a top-down decision that made it mandatory for lenders to lower their interest rates, regardless of their financial status.
After the landmark ruling to lower rates, MCC was assigned to assemble from time to time to assess the economic conditions and alter the benchmark interest rate accordingly.
“ MCC brings up the issue in its meetings on a regular basis and we act according to the latest market reports,” Seif said.
As early as May this year, Abdolnaser Hemmati, head of the Coordination Council of Public-Sector Banks, predicted that another two percentage point cut in deposit rates would ensue in three months to keep up with declining inflation.
But experts have warned against further reductions in interest rates, saying this would jeopardize the solvency of banks already facing asset vulnerability.
Massive government borrowing amounting to $30 billion, as well as their being compelled to make low-interest loans to certain business—aka non-performing loans—has put many public-sector and private banks in the red.
Based on recent estimates, NPLs amount to more than $30 billion, but the economy minister and other officials estimate the loans to be near $60 billion.
A further cut in interest rates also stokes fears that banks would further intensify their non-banking activities to make up for their dwindling revenues. A parliamentary investigative team recently revealed that over half the banks’ revenues is generated from speculative activities.
Commercial lenders are also stuck in a tug-of-war with uncertified credit and financial institutions over deposit rates, with non-conforming credit companies luring huge customers by offering exorbitant deposit rates.
First Things First
Seif pointed to banks’ diminished resources and their struggle to lend to businesses, saying that banks have no other alternative than to “prioritize” their lending resources.
“If the two ministries with specialized duties—Ministry of Industries, Mining and Trade and the Ministry of Agricultural Jihad—were to identify sectors which are most in need of lending, this would make it much easier for banks to lend,” he emphasized.
The CBI pursued two strategies in dealing with bad debtors: for manufacturing units, Seif advocated a policy of restraint and leniency.
“If an extension of loan repayment would help manufacturers to continue to operate and make them come up with a timetable for repaying their loans, then the banks could extend their loan terms,” he said.
“But it is natural that banks would make no exception for other bad debtors so they maintain their ability to lend to other businesses and stimulate the economy,” he added.