Saturday, April 08, 2006

Central Bank Against Lowering Interest Rate

Hamid Ahadi, Rooz Online:
Despite repeated arguments and objections by the Governor of Iran's Central Bank, conservative Majlis (Iran’s parliament) MPs approved to cut the bank's interest rate. Ebrahim Sheibani, the Governor of the bank who reportedly left the session of the Majlis in protest to the vote is rumored soon submit his resign from his post. His resignation had been brought up earlier as well when the new hardline government of Mahmoud Ahmadinejad took office last year, but higher authorities had intervened to stop him from leaving office. READ MORE

Majlis’ decision reduces the interest rate that banks provide for their services to a single digit figure, which is something that economic experts believe is destabilizing to the economy. This rate is normally shaped by the rate of productivity of the different sectors of the economy.

Initially there was a proposal to adjust the interest rate every six months, a move that was defeated by the Majlis.

Sheibani had said that if an impossible figure is imposed on the banking system, it will either be ignored or the law will have to be changed. He added that the rate had been reduced over the past 3 years from 24 to 14 percent. He also said that inflation had to be considered in the rate and that if it stayed at the current official rate of 17 percent, then it would do great injustice to the public. He argued that to really reduce the rate of inflation the country needed to start with macro economic policies and not by reducing the rate of interest that banks provided.If the rate of inflation hits the 20 percent mark and the interest rate is raised to 8 percent (which is what the draft provides), then people would rush to get loans and deposits must be paid 6 percent interest, which would be un-Islamic and irrational,” he concluded.

In the Majlis session when it became clear that Majlis MPs were disregarding the views of economic experts, Sheibani left the session and refused to meet with the press who had been waiting outside the parliament. One reporter managed to get one response from him when Sheibani said “It is not in the interest of the country to talk to me now.”

Economic specialists have been arguing that the interest on deposits and the interest changed for banking services should be determined by market forces, and they have communicated their arguments to government officials.