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EghtesadOnline: In bid to further narrow the rate spread in the interest rate corridor (IRC) the Central Bank of Iran announced that it would raise rates on interbank deposits by 1 percentage points to 13% starting today (Saturday).

This comes after almost a week since the CBI increased the rate at which central bank takes deposits from banks, from the previously 10% to 12% now. 

The development is in line with CBI monetary policy to control inflation through open market operation and the IRC. 

IRC is a system for guiding short-term market interest rates towards the central bank target/policy rate. It consists of a rate at which the central bank lends to banks (typically an overnight lending rate) and a rate at which it takes deposits from them (deposit rate). 

Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup. 

In a notice published on its website on Thursday, the CBI concurred that the current inflation rate is higher than the inflation target announced by the regulator. 

Earlier in May, it set the inflation target at 22% for the current fiscal year (March 2020-21).  This is while the average goods and services Consumer Price Index in the 12-month period that ended on June 20 increased by 27.8% compared to the corresponding period last year, the Statistical Center of Iran said. 

“The decision [to rise deposit rates] was made to narrow IRC spread and guide the inflation rate toward the set target,” the CBI notice reads. 

Earlier in May, the CBI said it would implement more aspects of OMO that involves regulating the borrowing of lenders from the CBI by obliging them to put up enough collateral when seeking funds. 

At that time the regulator set the cap for overnight interest rate for lenders that keep excess financial resources with the CBI at 10%. 

As for lending rules in the interbank market, the regulator set the rate at 22% for lenders in need of liquidity who want to borrow. 

The CBI says this will create the IRC, which is pivotal to its plan to target inflation at a fixed 22% for this year. 

 

Pinning Hope

To realize its anti-inflation goals the CBI apparently has pinned much hope on the OMO to manage and control interbank rates. 

The OMO was set up in January as part of its monetary policy to help curb inflation, control interbank rates and improve liquidity management. 

Within the OMO framework, central banks buy and sell bonds in the open market to increase or reduce money supply. They buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  By the same token, selling government bonds reduces base money and raises interbank rates. 

OMO is essentially used by monetary authorities to regulate the cost and availability of credit in the banking system and influence the level of money supply.  

Abdolnasser Hemmati, the CBI boss, said earlier that the regulator was concentrating on the OMO in the hope that the new monetary policy would help curb inflationary effects of the ballooning liquidity, as past measures failed to produce the desired results. 

 

Iran central bank Interest Rate interbank