Should Iran’s Central Bank Increase or Reduce Interest Rate?

Rooz Online

The conflict between Iran’s Central Bank (CBI) and the other banks in the country rose a pitch last week as they battled interest rates on deposits, facilities and services: all in response to comments by the managing director of Bank Melli regarding the opposition of the Council on Coordination of Government Banks to reduce interest rates. He was threatened with legal and disciplinary action.

The issue began when Abdol-Nasser Hemati, the managing director of Bank Melli and chairman of the Council on Coordination of Government Banks announced last week that he had sent, to CBI, four conditions that banks had raised in order to reduce the interest rate on deposits in government banks prompting Hamid Tehranfar, the Central Bank’s commercial deputy, to issue a threatening response.

According to Tasnim news agency, at a meeting of the Central Bank and government banks before the Nowruz new year holidays (March 21st 2015) Hemati had said that almost all the managing directors of the banks shared a similar position regarding lowering the banking interest rate and wanted those conditions. If the conditions for reducing the interest rate were not met, the banks argued, there would be violations and opportunity for misuse. The banks informed CBI of their conditions.

Hemati explained the conditions to be: “a reduction in overdraft rates, enactment of rules to access banking sources with better conditions, serious monitoring of unlawful and violating institutions, and the expansion of banking resources (by reducing the legal reserves and the increase of capital).” He explained, “Demand for liquidity is currently high because 90% of the financial needs of the economy are met by banks. Therefore, banks need to increase their interest rate on deposits to attract money to meet the rising demand. This situation creates the opportunity for banks to violate the interest paid on deposits. The main reason for bank interest rates not falling, despite a fall in the inflation rate, is this market reality. So long as issue is not resolved, the problem will persist.”

These remarks brought forth a sharp and quick response from the CBI. Hamid Tehranfar issued a statement in which he reminded officials of banks that they were expected to rigorously follow the rules and regulations and threatened that violating officials would face judicial consequences. “CBI shall never allow any violations of its announced rules especially those regarding interest rates on deposits and other facilities,” the statement read.

Some pro-government media have sided with banks in calling for more lenient punishment and penalties. For example, Fararoo website wrote, “CBI needs to raise its patience over remarks by specialists and respond in strictly professional language. Weaknesses in CBI’s management in recent years have led to widespread violations and even corruption in the banking sector.”

Asre Eghtesad, an economic magazine, also took sides with government banks. It cited examples when CBI had acted unilaterally by withdrawing money from government and private banking accounts, until the banks subsequently stood up against the practice.

Another magazine, Donyate Eghtesad also supported government and private banks by arguing that if private banks are allowed to operate in the country then they need to be able to control their own resources and policies to attract deposits.

Khabar Online however sided with the Central Bank and argued that CBI’s inconsistent response to inappropriate practices and policies of private banks had resulted in the disruption of the banking system in the market, all resulting in complaints by the official banking system. It pointed out that these very official banks themselves had provided credit and facilities to credit organizations that lacked operating licenses.