Why high inflation may return to Iran

TEHRAN, Iran — Top Iranian banking executives agreed Feb. 13 to cut the deposit rate of one-year rial saving accounts by two percentage points — from 20% to 18% — for the second time this Iranian calendar year (ending March 19). The decision came after persistent calls by monetary authorities on banks to set interest rates based on inflation, which now hovers around 12% — down from 40% in mid-2013, when President Hassan Rouhani was elected.

A day after the announcement, the Money and Credit Council approved the suggested rate, saying all commercial banks and financial institutions will have to comply as of Feb. 21. The council also lowered the business loan rate ceiling from 24% to 22%, in an attempt to make loans more affordable. Abdonasser Hemmati, head of the state banks coordination council and CEO of Bank Melli, on Feb. 13 warned financial institutions against violating the imposed rate cuts. Three days earlier, in a TV program broadcast on state television, he had said that the ideal deposit rate is 16%, given the lower inflation.

The Central Bank of Iran (CBI) is urging banks to slash deposit rates in the hopes that money locked in savings accounts will be channeled to manufacturing and capital markets — both sectors of which are in desperate need of a financial boost.

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This article was written by Alireza Ramezani for Al-Monitor on Mar. 3, 2016. Alireza Ramezani earned a master’s degree in journalism from Cardiff University in the UK.