Economy, Business And Markets

Interest Rates: Tread With Care!

Interest Rates: Tread With Care!Interest Rates: Tread With Care!

The research director of Monetary and Banking Research Institute has expressed concern over high ‘real interest rates’ which is the result of incongruity between current interest rates and the inflation rate.

“Interest rates have not come down in line with the inflation rate, and this increases the real interest rate,” Hamid Zamanzadeh was quoted as saying by Fars News Agency.

“Manufactures is one area that has been seriously affected in that producers have difficulty absorbing investment due to the high interest rates, and even in case of new investment, they are normally ineffective.’’

Consumers, on the other hand, prefer to keep their money in the form of deposits or bonds — in the hope of future gains, he added.

High interest rates drive up production costs, which are detrimental for both the production sector and the overall economy, he elaborated.

Despite considering high interest rates as the bane of the economy, Zamanzadeh was quick to add that lower interest rates – often emphasized by markets and economists -- is a tricky strategy which may stoke inflation if not implemented properly.

“A sharp decrease in interest rates will push up inflation, making further rate hikes all but inevitable in the not too distant-future,” he warned.

Therefore, it should be seen that all the economic sectors – and not just the CBI – rise to the occasion and help lower the rates so that “we can both pull the economy out of its woes and move toward a gradual decrease in rates based on economic recovery.”

 Forex Rates

Zamanzadeh described the management of the foreign exchange market as a challenge with which the country is grappling for almost four decades.

Given the importance of stabilizing the forex market during the post-sanctions era, he said that due to the international sanctions, the drastic cut in oil exports, and isolation of the banking sector from the global banking network, the forex market experienced wild fluctuations and national currency (rial) lost 70% of its value by 2013, he said.

However, since the current administration took office and negotiations over Iran’s nuclear program started, the US dollar has remained almost steady, fluctuating between 30,000 rials to 36,000 rials.

Saying that how the country spends its oil revenues is one of the determining factors in economic wellbeing he noted, “Due to the previous government’s mismanagement of oil revenues, we faced a tough time  during the sanctions years and suffered from shortage of foreign exchange despite the swelling oil revenues.”

Oil revenues should be managed efficiently to stabilize the forex market which is a major stimulus for attracting foreign investment and preventing future foreign currency crises, he stressed. “However, the expenditure of oil revenues should be such that the real exchange rate does not decline as that would hurt competitiveness in the domestic and global markets.”