New Rate Cut Will Herald Decline in Inflation Rate

EghtesadOnline: The Money and Credit Council –a decision-making body–is pondering a further cut in bank interest rates, as the inflation rate is likely to continue on its downward trend, says a former governor of the Central Bank of Iran.

News ID: ۷۳۶۰۷۴

21 August 2016

"A second cut in interest rates [this year] by the MCC will mean that the CBI and MCC analysts have gauged the country's economic conditions and concluded that the inflation rate will continue to fall," Tahmasb Mazaheri was also quoted as saying by IBENA.

"If the MCC does, indeed, decide to go ahead with another rate cut, it is safe to assume that the CBI has forecast a further drop in inflation rate, which makes further rate cuts all but inevitable ."

Mazaheri’s comments come after Bahman Abdollahi, an MCC member, disclosed on Friday that a further decrease in interest rates is imminent.

“At any given moment, it is possible for MCC to make a new decision regarding interest rates, in view of the current economic circumstances and the fact that the inflation rate has gone down,” he said.

Referring to the possibility of more rate cuts, Mazaheri said interest rates have a direct correlation with the inflation rate and “if the inflation rate goes down, interest rates too must be brought down”.

Mazaheri, who is also a former economy minister, noted that since President Hassan Rouhani’s administration took office, the inflation rate has been tangibly tamed owing to CBI’s policies and its positive repercussions have been felt, according to Financial Tribune.

“Based on that, both the interest rates and lending rates were lowered,” he said.

Reducing inflation has been a primary goal of the government of President Hassan Rouhani and he has had success in achieving that goal. In late June, headline inflation fell below 10% for the first time in 26 years.

The fact that inflation rate reached 9% in July means the discrepancy between interest rates and inflation rate is “higher than normal”, he said.

Considering that deposit and lending rates currently stand at 15% and 18% respectively, the former CBI chief noted that the gap between the two rates compared with the inflation rate is 6% and 9%, “which is very huge”.

As to what stands in the way of closing the gap between interest rates and the inflation rate, Mazaheri identified sour assets in the banking system and the dilemma of credit crunch as the main impediments.

“Credit crunch has increased demand for credits,” he said, because of which interest rates and the inflation rate have grown unusually apart.

“To alleviate the problem, the CBI might consider loan packages or other helpful solutions that can eliminate at least a part of the credit crunch, subsequently allowing the banks to have better lending power. That would narrow the gap between interest rates and the inflation rate, bringing interest rates further down.”

Highlighting the benefits lower interest rates hold for the economy, the former economy minister advised the government and CBI to bring the inflation rate and, as a result, interest rates, further down.  Mazaheri also warned that if for any reason the inflation rate declines, the CBI must be ready to increase interest rates in response.

“The government must strive to prevent the inflation rate from rising again and always keep an eye on it. But should the inflate rate rise, interest rates must go up too because if this does not happen, it will irreparably damage the country’s banking system. So the CBI should stay vigilant,” he said.