Economy, Business And Markets

Interest Rates, Inflation in Tug-of-War

Interest Rates, Inflation in Tug-of-WarInterest Rates, Inflation in Tug-of-War

A central bank official said financial authorities have been on the horns of dilemma as to how to respond to conditions since March last year, when inflation fell considerably but interest rates remained obstinately high.

Farhad Nili, head of the Monetary and Banking Research Institute, told reporters on Monday that the recent cut in interest rates announced by the Money and Credit Council was inevitable since for the first time the inflation rate has been lower than the deposit rate ceiling.

The MCC lowered the ceiling to 20 percent last month from 22 percent. Lending rate was also cut from 28 percent to 24 percent.

“But the media and press have not focused on the sharp decline in inflation [from once 40 percent to 15 percent] and instead gave constant attention to the cut in interest rates,” Nili said in comments posted on the CBI’s website.

When asked if forcing banks to cut interest rates was the right decision, he declined to comment, saying instead that related experts should opine.”

He said: “It should be noted that interest rates are subject to reviews every three months and differences between banks will be accounted for. Currently, there are those who maintain that officials should look at the discrepancy between the inflation rate and interest rate with regard to non-performing loans that have afflicted banks in recent years.”

“Anyhow, the MCC’s ruling in this regard is an imperfect one and we can wait until two and a half months to see what their next decision will be,” he added.

 Currency Forecast    

Nili was uncertain about the dollar’s future exchange rate, saying forecasting the greenback’s exchange rate versus the rial would only be possible if the currency market was free.

The Central Bank of Iran heavily weighs on the foreign exchange market.

“Supply and demand affect the foreign exchange market,” said Nili, “I believe it is not possible to predict exchange rates. Despite all of this, policymakers have stabilized the market”.

 Cloistered Capital

The head of the research center said a large part of banks and insurance companies’ assets were locked in the real estate market, eroding their financial clout. He added that the credit crunch created from this issue is a major challenge for the economy.

“The bad debt cycle can only be broken by the government or the central bank,” Nili said. “The government is trying to repay its debts to contractors by selling sukuk as a way to ease the credit crunch.”