Former governor of the Central Bank of Iran Tahmasb Mazaheri said the recent decision on cutting deposit and loan interest rates would positively affect the economy if necessary prior conditions are created.

The decision was made by the Money and Credit Council (MCC) in a meeting on April 28 to decrease deposit rate ceiling (for one-year deposits) from 22 percent to 20 percent and set lending rate at 24 percent, cutting it from 27-28 percent.

Mazaheri regarded the adjustment in the deposit rates for inflation as a “fundamentally right decision, saying it was the most significant achievement of the MCC.”
The expert further said the council is also expected to revise the rates if the current downward trend of inflation is reversed for any reason, Banker news website reported on Wednesday.

But he also criticized the regulator saying that the CBI should have set the lending rates adjustable in consonance with the customer’s credit rating, which is a common practice worldwide, a process that would let the banks grant lower-interest loans to responsible loan takers who have met the terms of their previous loans.

He also argued that the rates had to be determined in a way to help create lending competition among banks.

“As the council has only decreased the rate of one-year deposits to 20 percent, the banks can still compete in determining rates of sight deposits,” he underlined, suggesting that if the banks’ adhere to the rates set by the regulator, the CBI needs to let them feel free to offer 2-5 percent extra interest rate to one-year deposits. He argued that the decision could help competiveness.

He believes that the decline in deposit rates would channel part of their liquidity into capital market and businesses, leading to the betterment of economic conditions. But, he added, if the government fails to overcome the problem of unauthorized financial and credit institutions violating the interest rate regulation, the cuts would be a wrong policy as it would weaken some banks’ lending power and strengthen that of illegal institutions.

The expert expressed concern about the deficiency in the banks’ funds, urging the government to pay its debts to the banking system and the CBI to decrease the reserve requirement rate to help the banks raise capital. “As long as such measures are not taken, the rates decline would backfire on the manufacturing sector,” he concluded.

By Financial Tribune