Economy, Business And Markets

Interest Rate Cuts Close

Interest Rate Cuts CloseInterest Rate Cuts Close

As the inflation rate continues to decline, analysts and senior government officials, including President Hassan Rouhani and the Governor of the Central Bank of Iran, Vailollah Seif, have echoed the need for further cuts in interest rates to help stimulate demand and ease the recession.

The goods and services Consumer Price Index for urban areas increased 14.8% in the 12-month ending October 22, which marks the end of the Iranian month of Mehr, compared to the same period last year, according to the latest CBI report. The CBI had reported 15.1% inflation for the month preceding Shahrivar (ended September 22). Earlier, the Statistical Center of Iran put the inflation rate for Mehr at 13.3%.

However, there are those who argue that the inflation rate should not be the only factor when deciding rate cuts. “There are many hidden aspects in the economy that raise the cost of money like increases in inter-bank rates, market mechanisms, activities of uncertified financial institutions and  the commercial banks, “ the critics say as quoted by an article posted on the Persian-language website.

The Money and Credit Council, the country’s top monetary policymaker, is worried that further cuts in interest rates could give an unwanted boost to the unlicensed  credit/lending institutions who have no time for the repeated instructions and warnings of the regulator.

That is why cheap loans should be first directed towards manufacturing instead of consumption in order to prevent the rise of brokers and middlemen and reduce the credit crunch.  Critics believe that further cuts in interest rates will further incite rent-seeking activities by limiting access to cheap loans to vested interests. In other words, the dire effects of such decisions on the economy, long saddled with more than its share of problems, are what most critics are wary of.

 Improving Lending

Following the recently-unveiled economic incentive package by the administration, speculation has it that interest rates may drop as low as 16%. The latest incentive package, among other things, envisages a 3% cut in banks’ reserve ratio to 10% in a bid to release additional resources of banks and improve their lending power. Besides, consumer financing through debt purchases and car loans at 16% are other incentives in the package.

Some members of the MCC have said that CBI’s decision to balance the inter-bank market is an attempt to push the interest rate close to the inflation rate, albeit gradually and possibly in two stages, initially lowering the rate to 17% -18% and then to 16%.

The decision on further cuts in interest rates has been postponed to the next MCC meeting, according to Bahman Abdollahi, a member of the council who shed some light on the proceedings of last week’s meeting.

The council reportedly intends to examine the case more closely and has yet to make a firm decision. The framework of the decision, however, is said to have been defined in light of earlier decisions of the council on car loans which is 250 million rials ($8,345) at 16%  and home appliance loan which is a 100-million-rial credit card at 12%.