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Where will bank deposits go?

Dead - end for interest rates

With the implementation of the directive to reduce interest rates on bank deposits, there is a concern that some bank resources may find their way to other markets.

Mehr News Agency

With the implementation of the directive to reduce interest rates on bank deposits, there is a concern that some bank resources may find their way to other markets. Decrease in interest rate on bank deposits to 10 to 22 percent has begun in all branches of the banks throughout the country under the close supervision of central bank inspectors. This emphasis on inspection and controlling violations is highlighted by Iran's central bank which, just about two months ago, strongly denied any increase of interest rates by the banks.
Both private and public banks decrease their interest rates on bank deposits simultaneously. Nonetheless, some experts have widely criticized this new development as they believe it will pose a serious challenge for private banks and will also lead to an outflow of liquidity from the banks.

Withdrawal of resources
In addition to the regulation of interest rates on bank deposits, one of the goals of policy makers in cutting bank interest rates is to direct cash flow toward capital markets. While a great bulk of resources which is held by the banks are directed toward manufacturing sector, some economists assert that the government is expected to follow serious proceedings and plans to direct liquidity toward capital markets. Otherwise, due to recent price fluctuations in the currency and gold coin markets and the attractiveness of these markets for many people, the liquidity which is being taken out from the banks may be drawn into these markets. This will lead to an increasingly volatile situation in the currency and gold coin markets and will destroy the government's prior attempts to maintain price stability in these markets.
Some suggest that the central bank is better to dispatch some of its inspectors to free currency market in order to closely supervise proper implementation of bank interest rates, thus preventing an increase in exchange rate in the black market. However, it should be kept in mind that not all price fluctuations in currency and gold coin markets relate to speculative acts.
The chairman of the coordination council announced that some unlicensed finance and credit institutions began the race to pay higher interest rates in order to attract deposits. Although the central bank announced that the directive on new interest rates has been declared to all bank managers, some managers of these unauthorized institutions say that they have not received such directive.

Turbulence of Parallel Markets
Mehr News agency reporter went to several banks in order to ask people for their opinions about this new directive. "Sound economic policies are those in which bank directives do not change every day, so investors can make real decision with regard to their resources", said a customer in the bank. Another person said: "Interest rates of the banks should be determined in a competitive atmosphere and the central bank should not have any intervention in them." He also added: "of course some private banks and institutions may not follow the central bank directives or even try to circumvent them. They argue that if interest rates become equal in private and public banks, some private bank customers may want to transfer their deposits to public banks".

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