The central bank lacks the courage to control inflation

The central bank lacks the courage to control inflation.

According to Iran Gate, in the past week, news of a 20% increase in bank deposit interest rates was published, which led to reactions from financial market participants and economic experts. Economists, who have always emphasized the need to use monetary tools to control inflation, now believe that a 2% increase in interest rates will not cure Iran’s economy with over 40% chronic inflation.

On Monday, news of a 2% increase in bank deposit interest rates was published, which was followed by a reaction and denial from the central bank. This reaction came while a statement with the same content was also published on the official website of the central bank. Additionally, the head of the High Coordination Council of Private Banks confirmed this matter and announced the increase in bank deposit interest rates from 18% to 20%.

The story of interest rates and the independence of the central bank.

In developed countries, the central bank operates as an independent institution from the government, with the aim of preserving the value of the national currency. This independence is manifested in the central bank’s use of monetary tools to control inflation rates. However, in Iran, such independence is not seen in determining the country’s most important monetary tool, which is the interest rate. Economists consider the interest rate as an effective channel for controlling inflation and preserving the value of the national currency.

But in Iran, the process of determining the interest rate has been largely influenced by extensive and comprehensive government interventions, which have practically excluded the central bank’s chief from the main responsibilities of monetary and banking policy-making. The Monetary and Credit Council includes representatives from various governmental and governing bodies, each with their own demands. As a result, the central bank chief, due to their direct appointment by the head of the government, has no choice but to comply with the demands of cabinet members and stakeholders.

What is the actual interest rate?

Nevertheless, many believe that the nominal interest rate of 20% recently announced by the central bank in secret signifies the negative real interest rate on deposits in the Iranian banking system. This is because the annual inflation rate had already exceeded 40% by the end of autumn, and the interest rate will always lag behind inflation by 20%.

However, the banks have not remained idle and have designed various tricks to increase the imperceptible and unofficial deposit interest rate, and subsequently the lending interest rate. One of these tricks is to lock a significant portion of the loan amount in the applicant’s bank account, which essentially becomes non-withdrawable funds in the customer’s account.

Nevertheless, many economists believe that the bank interest rate exceeds 30% and is at least 10% higher than the ceiling announced by the central bank. In other words, banks offer significantly higher deposit interest rates to attract more deposits, while charging higher interest rates, exceeding 30%, on loans granted to applicants, which are subject to much greater government pressure. This is done in order to compensate for the deep gap between the interest rate and inflation.

Take it or leave it, it’s just a facade.

Now the government and the central bank announce that serious action will be taken against branch managers who do not comply with the interest rate ceiling. Of course, it is inherent right of the supervisory institution to have legal confrontation with violators. However, the issue here is that non-compliance with the interest rate by all private and government bank branches is not something that can be hidden from anyone.

In fact, the central bank and the government intend to present the positions of this case in a way that prevents opponents of interest rate hikes from rebelling. In other words, the central bank will seemingly imprison the violators in a closed room and pretend to be punishing those who have committed offenses with a lot of noise and commotion.

Stakeholders and opponents of interest rate hikes are also aware outside the room that there is no real punishment for the violators beyond the wall. However, a kind of peaceful synergy or coexistence has been created between the residents on both sides of the wall. This is because the more than 10% gap between the nominal interest rate and the real interest rate has provided the grounds for distributing large rents among the influential individuals. In fact, it can be said that everyone is imprisoned by their own interests, and once again, national interests have become victims of policies that solely serve the personal gain of corrupt and destructive government and private elements.