Interest rates by decree criticized

In response to recent statements by Economy Minister Ali Tayyebnia regarding a cut in interest rates for a second time in as many weeks, Mahmoud Dodange, an advisor to the minister of industry, mines and trade said cutting rates by decree without decent investment and growth rates would not produce the desired results.

“Bank interest rates are among the key macroeconomic variables to which we should pay close attention. However it is obvious that any tailored policy regarding key economic variables, specifically regarding interest rates, could pose serious challenges” he was quoted by ISNA as saying.

He then went on to discuss an approach proposed by experts for resolving this persisting problem. “One measure proposed by economists is to revitalize the different sectors of the economy by incentivizing investment to different parts of economy.”

Addressing the challenges that could arise from enforcing rate cuts, Dodange argued these would have some positive impacts in the short-term but will be ineffective in the long run.

“With little prospect for investment and economic growth, enforcing regulations regarding key economic variables may be effective in a short-term period but it is certain that we cannot expect any long-term benefit . However, when inflation declines, the public expects lenders to reduce rates,” he maintained.

If the only fuss is over interest rates, making top-down decisions regarding them while failing to supervise banks on how they lend to businesses, we “can hardly expect a satisfactory situation in the future.”

He raised a number of questions about the current situation in the banking system, asking if there are banks that are honestly abiding by the rules and regulations guiding interest rates. “Do businesses have access to loans with rates lower than 20%?”

One has to look at the both sides of the coin when it comes to rate setting, the advisor stressed. “The issue should be examined for both sides…In the present situation the rates should be gradually and steadily lowered in conjunction with related factors.

By Financial Tribune