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.
