Inflation likely to rise in Rouhani’s Second Term

On the other hand, banks and financial institutions would be deprived of deposits if bank interest rates sink to around 10%. One risk would also be that many deposits might flow toward less regulated or unregulated financial institutions that offer higher interest rates.

Another challenge to the government is finding the right balance between containing inflation and stimulating the economy. Indeed, the government still plays an important role as a main investor and job provider in the economy, hence the need to use government funds to stimulate the economy and create jobs through infrastructure investment, for example. This phenomenon usually leads to budget deficits, which are in themselves a cause of inflation. Consequently, sustaining low inflation will clash with the government’s need to create jobs and promote economic growth.

There also is the issue of what to do about the exchange rate between the rial and major currencies. On the one hand, the Rouhani government has committed to maintaining a certain degree of currency stability to promote investment. On the other hand, lower inflation can make Iranian exports less competitive in the international market.

Consequently, a degree of currency devaluation will be needed to address the concerns of Iranian exporters and their wish to maintain export markets. Seif said managing CBI’s international hard currency reserves and sustaining stability in the foreign exchange rates will be the most “sensitive and complex” responsibilities of the CBI.

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