Iran keeps rates at 12% despite IMF call

Iran’s central bank has told the country’s lenders that interest rates will remain at 12 per cent, despite a call by the IMF to tighten monetary policy to fight inflation.

The government’s policy to keep interest rates well below inflation, now running at an annual rate of about 26 per cent in the world’s fourth-largest oil producer, has drawn widespread criticism from economists. Price rises have become a major grumble for many ordinary Iranians ahead of next year’s presidential election, when President Mahmoud Ahmadinejed is expected to run again.

The IMF urged Iran to hike rates and take other policy measures in a report published earlier this month. Last week, Central Bank Governor Tahmasb Mazaheri said raising interest rates would be a “logical and correct” step to help curtail inflation, but Ahmadinejad’s government has made clear it opposes any such move. “Mazaheri finally accepts banking interest rates at 12 per cent,” said a front-page headline in the Edalat daily after the central bank officially notified state and private banks about interest rates for the 2008-09 year that ends in March. Lending rates would be even lower, 10 per cent, for special priority projects designed to boost employment, including in the agricultural sector, media reported. Mazaheri warned in June that the government’s low interest rate policy risked hyper-inflation, but Ahmadinejad has said those who opposed cutting rates should “step aside”.

One of the president’s ministers said higher rates would hurt job creation and stifle investment.

Year-on-year inflation climbed to 26.4 per cent in June. The government has blamed global factors for the price rises but Ahmadinejad’s critics say the main reason is his lavish spending of windfall petrodollars based on his vow when he came to office in 2005 of spreading Iran’s oil wealth. Economists say the central bank has in the past lacked room to manoeuvre in the fight against inflation, partly because of rate rise restrictions and because parliament set limits on how much financial paper the bank can issue to soak up liquidity.