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October 2021, No. 98


Economy

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 should.

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.

 

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