Which Interest Rate Benefits Iranian Economy?
Inflation and high
interest rates in most countries of the world have often become a
distant memory rather than a daily occurrence.
Interest rates have always been one of the most controversial issues in the
Iranian economy. When the concept of monetary policy was formed in Iran and
first the National Bank and then the Central Bank took responsibility for
this important issue, determining the price of money or the interest rate
has led to many margins and issues. Inflation and high interest rates in
most countries of the world have often become a distant memory rather than a
daily occurrence. Meanwhile, inflation in Iran has settled well and the high
average inflation rate in recent decades has caused the expected rate of
return in the country to always remain high.
At the same time, the sanctioned and suffering economy of the country in
recent decades has needed more than anything to follow the path of growth
and development with the right financing. While there are other structural
issues, including cumbersome bureaucracy and foreign issues that limit
international trade, the high cost and financing itself is a barrier to
companies being able to address their day-to-day development issues as they
This has caused, like other markets, the issue of mandatory pricing in the
money market seems obvious and the policymaker has tried to control the
Iranian economy from time to time by raising and lowering interest rates.
However, keeping bank interest rates low has made money hotter than ever
over the years with increasing systematic risks and, consequently, inflation
expectations, and its return to all asset markets more rapidly. This is
precisely the reason why with the growth of liquidity we have witnessed
increasing inflation in the Iranian economy in recent years.
All of this has come at a time when the pressure of sanctions and declining
purchasing power, along with a lack of working capital and even the money
needed to create development projects, have made the road more challenging
for producers than ever before, making them facing difficulty due to high
financing costs. In this situation, however, some believe that due to high
inflation and consequently negative real interest rates, the country needs
to increase interest rates. However, an increase in this rate not only
reduces the banks’ financing capacity and weakens production, but also makes
them more inclined to bear the costs of making deposits more profitable due
to their unfavorable situation. In other words, increasing the cost of
financing and the same interest rate that can be to the detriment of the
capital market cannot help the money market or production much. It seems
that in the face of the current situation, the Iranian economy needs more
than anything to increase the security of economic exchanges by reducing
systematic risks and respect for private property, and while stopping the
growth of liquidity in order to reduce the real cost of money.