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INFLATION TOP PRIORITY

Iran says no plans to hike rates for now

Dubai, September 15, 2012

Iran will not raise bank interest rates, the central bank governor said on Saturday, judging damping down double-digit inflation a higher priority than stabilising the volatile rial currency.

"The bank interest rate will not change for now until we see what happens with inflation and to what extent we can bring it down," said central bank governor Mahmoud Bahmani, according to the Iranian Students' News Agency (ISNA).

"Normally bank interest rates must be determined relative to the inflation rate."

Iran's economy suffers both from high inflation and a depreciating currency, which itself has contributed to further increases in consumer prices.

President Mahmoud Ahmadinejad, now in the last year of his administration, hiked Iran's bank interest rate in January to up to 21 percent, hoping to spur a strengthening in the rial following Western sanctions targeting Tehran's oil exports and central bank caused a spiralling in the currency's open market value. The rial strengthened slightly after the move.

Iran's inflation rate stood at 21.5 percent for the Iranian calendar year ending March 19, according to the central bank, though unofficial estimates put it twice that high.

U.S. and European sanctions, aimed at getting Iran to give up its disputed nuclear programme, have bitten deep into the economy, while government attempts to stem the crises have often worsened inflation and depressed the value of the rial further.

Last week the rial reached record lows around 25,000 to the dollar on the unofficial market, half its value a year ago and a drop of about 17 percent in three days. In the last few days it has stabilised around 24,350 to the dollar, according to currency-tracking website Mesghal.

The direct cause for the sudden drop was unclear, but it may have been due to a dash for dollars by Iranians fearful that further diplomatic and economic isolation would erode the central bank's ability to defend the rial's value.

The rial's slide is itself a risk to high inflation, as Iran is reliant on imported consumer and intermediate goods whose prices have surged as the rial has depreciated.

The centerpiece of Ahmadinejad's economic platform, an ambitious subsidy-reform plan that aimed to wean the country off generous food and fuel subsidies, has since been criticised for worsening inflation thanks to monthly cash payments to Iran's poorest citizens.

Critics of Ahmadinejad in the legislature have taken aim at his administration's handling of this month's currency crisis and accused the central bank of causing the crisis by not providing the market with enough dollars to meet demand.

Bahmani will be invited to a closed-door session in Parliament to answer questions about the fluctuations in the currency's value, after the body was dissatisfied with the answers last week of economic minister Shamseddin Hosseini, legislator Abdulreza Mesri told Iran's Fars news agency on Saturday.-Reuters




Tags: inflation | Iran | Interest rates |

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