Iran cuts interest rate

Discussion in 'Economics' started by Pekelo, May 26, 2007.

  1. Pekelo


    Iran interest rate cut sparks panic selling

    Robert Tait in Tehran
    Friday May 25, 2007
    The Guardian

    Iran's financial system suffered a fresh jolt yesterday with panic selling on the stock market after the president, Mahmoud Ahmadinejad, abruptly ordered banks to cut interest rates sharply, despite surging inflation.

    The order, which Mr Ahmadinejad issued by telephone during a visit to Belarus and which flew in the face of expert advice - has triggered warnings of a financial crisis and spiralling corruption amid fears of a capital flight from the country's lending institutions.

    Mr Ahmadinejad's decree forced all state-owned and private banks to slash borrowing rates to 12%. Inflation is officially 15% but is generally believed to be much higher. State banks had been offering rates of 14%, while those in the private sector ranged from 17% to 28%.

    The decision caused panic in the Tehran stock exchange, with private banks losing much of their share value overnight. Shareholders in one bank, Karafarin, queued on Wednesday to sell their stock when previously there had been 1.2 million applicants to buy its shares.

    There was speculation yesterday that the move could force the resignation of the economy minister, Davoud Danesh-Ja'afari, who was not consulted.

    Interest rates are normally set by the head of the central bank, who is nominally politically independent. The Hammihan newspaper carried a picture of a disconsolate-looking Mr Danesh-Ja'afari holding his head in his hand under the headline: Shock on the Tehran bourse.

    The rate cut was imposed at the same time as Mr Ahmadinejad raised the price of petrol by 1p to 5p a litre. That caused anger among motorists, who expected a new rationing system to be introduced on Tuesday. The government has postponed rationing until next month, citing difficulties in introducing the necessary technology to filling stations.

    The interest rate move theoretically helps the less-well-off, for whom Mr Ahmadinejad has pledged support with cheaper loans. But economists say cutting rates below inflation will scare investors into withdrawing their savings, thereby creating a black market in high interest loans. They also warn of higher inflation as investors redirect their money into property and push up house prices.

    "Mr Ahmadinejad's argument is that the lower the interest rate, the more access people will have to money," said one analyst. "But you can't command interest rates down. They have to match inflation. To cut rates, the government has to balance its budget better."

    Another economist, Saeed Leylaz, claimed the move was a reward to powerful groups who had supported Mr Ahmadinejad. "I believe the president knows the consequence of this decision but he doesn't care about the future."

    "There are groups which helped put Mr Ahmadinejad into office and in my opinion, he is paying them back. In the last two years, the value of (outstanding) debts has reached US$11bn, compared with $3.5bn in the previous 100 years. Mr Ahmadinejad ordered the banks to pay these accelerated loans to the special groups. If you cut interest rates, it means they have less to pay back. You can imagine how disastrous this is to the banking system."
  2. Nothing like an economic crash to stir the masses into action and perhaps overthrow the mullahs and bring some sanity back to what was once, and still could be a great nation. This could be a positive long term development.
  3. Babak



    I wonder why the Guardian's journalist never bother to ask about the fact that charging any intererest is against Islamic law?
  4. I was thinking the same thing. They aren't supposed to charge any interest.
  5. I expect inflation rates in the 15 % to 20 % per year range to coincide with raw material shortages. I expect raw material shortages to reduce the rate of Iranian economic growth.

    I suspect a reduction in the growth rate of the Iranian economy might appear as a decrease in the exchange rate between Iranian currency and other currencies.

    Attached is a graph of 5 years Iranian Real to Euro exchange rate. I calculate Iranian Real / Euro exchange rate is decreasing about 13.5 % per year.


    Iranian soccer team 2006 World Cup in Tehran.

    <img src= \img>

    One way the people of the USA might develop a friendlier relationship with the people of Iran might be to play a few sports games together.
  6. What historical reference? Great nation? :p
  7. atticus, I guess you don't know history. Read couple of books and you will understand.
  8. Such as? Their Zoroastrian period? The Sassanian Empire was of minor importance. I know, you saw "300", right? I hear the Roman Empire is making a comeback too! C'mon Muppet, we're here to learn...
  9. moo


    Uh.. unbelievable! If this story is not a joke, then the Iranian economy is.

    Anyone have a chart of the Tehran stock market? (in dollars/euros, if possible)