News ID: 113843
Published: 0706 GMT March 14, 2015

Monetary debates still heated

Monetary debates still heated

The decline in inflation rate has sparked vigorous debates on whether the government should reduce interest rates for deposits or maintain them at current levels.

The Economy Ministry has announced a drop in inflation rate to about 15 percent while the average interest rates on deposits still remain high. Interest rates depend on whether clients make short-term or long-term investments. The Central Bank of Iran (CBI) has officially permitted the banking system to grant up to 22 percent on one-year deposits.

Economic experts have debated the pros and cons of reducing interest rates in numerous articles published in the media. The opponents have listed a number of reasons for their assertions in favor of lowering interest rates.

First, the government has formulated plans to reduce liquidity which have curbed rampant inflation while adversely affecting cash circulation. Hence banks offer higher interest rates on deposits to offset their financial problems. Once the government requires that banks cut interest rates, unauthorized financial institutes would devise schemes to lure the cash leading to fresh economic crisis.

Unauthorized monetary and financial institutes have posed serious challenges to the national economy. They refuse to comply with banking rules and attract huge liquidity by offering tempting interest rates and channel it to lucrative projects, which push inflation up.

Second, once the banking system lacks adequate liquidity, payments of loan will be deferred giving rise to wheeling and dealing. Applicants will then have to resort to 'under the table' schemes to receive loans. The gloomy phenomenon will corrupt the banking system.

Third, banks will be unlikely to comply with official directives to slash interests rates on deposits since the large number of major defaulters will be seriously threatened. In other words they might draw up schemes to overcome looming problems.

Fourth, gold, forex and construction markets may gulp investments besettimg the national economy with economic crises, which were rife over the past years. Once the CBI fails to control domestic markets, inflation will wreak havoc on the economy.

Fifth, oil earnings have fallen to below $60 per barrel while unfair US-led sanctions are still in place. Hence, the government will be unlikely to respond to impending crises if the national economy undergoes major upheavals.

However, the proponents argue that the production sector would remain sluggish if banks amass huge liquidity. As a result, interest rates should be reduced to encourage investors to pursue productive projects. They believe that the gap between interest rates and inflation rate should be balanced to stimulate economic and industrial sectors.

Despite arguments for and against the manipulation of interest rates, CBI should formulate policies to cushion the blow from imminent economic disasters. The body should spare no efforts to overcome obstacles that destabilize markets. Stability is the key to regulating national market and implementing long-term approaches that boost the economy.

Even though CBI and the Economy Ministry should take note of the recommendations of experts, they are required to address all economic equations to weather impending troubles.

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