Economy, Business And Markets

Limited Gov’t Role Needed in Setting Rates

Limited Gov’t Role Needed in Setting RatesLimited Gov’t Role Needed in Setting Rates

One of the signs of a competitive and market-based economy is that interest rates are determined by markets and correspond to profit levels in the markets. However, in developing countries like Iran lending/deposit rates are normally set by the government. In an opinion piece for Tehran’s Chamber of Commerce’s website Ali Ghanbari, the deputy minister of agriculture, has delved into the issue of rates and the government’s role in the process.

Government interference in the economy is inevitable in almost all economies, but the scale and sectors in which the government can interfere are open to debate, according to Ghanbari. “The scope of government interference in the economy should be optimized and controlled and the mechanisms and strategies for such interference should be transparent.”

  Striking a Balance

If a decrease in interest rates occurs as a result of the mechanisms of the market, it means that some sectors in the economy are yielding lower profits. Under the conditions lower interest rates cannot encourage people to withdraw their money from banks and invest in other markets, the senior analyst explains.

Interest rates were cut twice during the fiscal year that ended on March 19. The cuts brought deposit rates down to 18% from 20% while the lending rate was set at 22%. The measure taken by the Money and Credit Council – the top decision-making body – as a result of the government’s disinflationary policies met with mixed responses from business analysts.

“The CBI should understand the relationship between interest rates and inflation and come up with ideal rates. In such a situation the deposit/lending rates are determined independent of what the government wants,” he wrote.

  Discretionary Measures  

The analyst states that the current health of the Iranian economy hardly leaves the government with any option but to interfere and set rates. “In light of the long recession, sluggish demand and plunge in oil revenues, the government should use all the tools at its disposal to inject liquidity into the economy.”

Ghanbari believes that lowering rates is among the quickest tools the government can draw upon to encourage the outflow of money from banks into the real economy. Such a measure can give momentum to easing the credit crunch and creating jobs. He states that although such practices violate CBI independence, they are ‘discretionary’ measures by the government and also necessary.

“Although this is a type of direct government interference in setting economic variables, it is not a negative phenomenon. The government approach to the  lowering of rates has been discretionary and it is a must for developing economies.”

He makes the point that government interference in the economy is not always a bad thing. “When markets falter, the government has no choice but to interfere. Sometimes discretionary measures produce better results than rules mentioned in [economic] textbooks.”