As the rial fails to regain lost ground and Iran's markets are imperiled by a high volume of liquidity, the country's monetary regulator may be left with no choice but to raise interest rates. The recent actions of the Central Bank of Iran (CBI) have reinforced months of speculation that an about-face on bank deposit rates may be in store.
At present, bank deposits with terms of at least one year pay annual interest legally capped at 15% per a 2016 ruling by the Money and Credit Council, Iran's highest financial decision-making entity, which also set lending rates at 18%. But banks failed to adhere to those rates, partly because they were unable to compete with higher yields offered by Islamic treasury bonds that at times offered annual returns to the tune of 28%, and partly due to a myriad of other major challenges such as a choking credit crunch that encouraged them to offer higher interest to attract deposits. This gradually became public knowledge, but as there was a consensus to bring the rates down to foster domestic production, the CBI doubled down on enforcing the rate caps on Aug. 22, 2017. However, the regulator considered a short implementation lag, effectively giving the banks 11 days to absorb as many high-interest deposits as they could.
The move meant that the ailing banking system could function for another year under the previous conditions while at the same time allowing the regulator to maintain the appearance that it is enforcing its forcibly lowered rates. Perhaps the plan was to await the finalization of long-stalled banking reforms to expand the scope of corrective measures. But fast forward to the present, and a currency crisis formed on back of worsening outlooks due to re-imposed sanctions in the aftermath of the US withdrawal from the nuclear deal has meant that annual returns of 15% are simply not going to be attractive enough when compared to massive profits yielded by purchasing hard currency and gold coins.
"There are clear signs that any changes to bank interest rates would only take them higher," a financial source with a seat on the board of a major Iranian bank told Al-Monitor on condition of anonymity. "When the government participation bonds in the capital market have yields going much higher than 20%, bank interest rates can only move toward that direction."
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