Why High Inflation may Return to Iran

By Alireza Ramezani, for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

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.

Most Iranian banks are now reconnected to global transaction network SWIFT after a four-year hiatus due to sanctions, and the government is also vowing to repay a major part of its debt to the banking system. These developments are seen as incentives for banks, which will probably see a fall in money cost and a rise in financial resources. The only major problem yet to be addressed is the issue of non-performing loans, which are estimated at one quadrillion rials ($33.1 billion). Officials hope that as the economy recovers in the post-sanctions era, industrialists will be able to gradually repay their debts to banks.

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