Iran ups bank interest rate to buoy rial

Associated Press

TEHRAN, Iran (AP) — Iranian President Mahmoud Ahmadinejad has approved increasing bank interest rates to 21 percent, state media reported Wednesday, in a reversal of his earlier opposition to a move economists said was crucial to absorbing liquidity in the market and supporting the Iranian currency.

The move came as the rial, under pressure after new U.S. sanctions targeting Iran's Central Bank, shed about 50 percent of its value relative to the dollar in the span of a month. The depreciation built on already mounting worries over the country's growing international isolation over its controversial nuclear program. The European Union earlier this week approved an oil embargo on Iranian crude.

"The president has fully approved" the increase in bank interest rates, Economy Minister Shamseddin Hosseini was quoted by the official IRNA news agency, adding that banks will be notified to change the rates starting Thursday.

Ahmadinejad has resisted a decision by Iran's Money and Credit council to raise interest rates — a move analysts and economists said was necessary to sap excess liquidity from the market and encourage Iranians to deposit money in banks instead of turning to the black market and buying hard currency.

While Iranian officials sought to stem the rials depreciation through a host of restrictions, including setting a new official exchange rate and banning the buying of foreign currency outside of licensed currency changing venues, the moves did little to allay concerns in the market. The rial, which was trading at 15,000 rials to the dollar on the black market at the start of the year, hit a record low of 22,000 rials to the U.S. currency by the weekend.

The market reacted to the announcement immediately, with the rial trading at 21,000 rials to the dollar within an hour of Hosseini's remarks.

Ahmadinejad's refusal to sign off on the council's decision stoked a rift between fiscal authorities officials and the president, with Central Bank Gov. Mahmoud Bahmani warning earlier in the month he may quit if the government continues to interfere in shaping monetary policies and does not approve an increase in bank deposit interest rates.

Iranian officials downplayed that the latest U.S. sanctions — now supplemented by a European Union embargo on Iranian oil approved on Monday, was affecting the currency or the economy. In an indication of the growing rift in Tehran, however, Bahmani acknowledged with rare candor earlier this month that the "psychological effects" of sanctions are partly behind the pressure on the currency.

Analysts say that the main reason behind the currency's depreciation was a decision to lower interest rates on one-year deposits to 14 percent from 17.5 percent. The rate cut prompted Iranians to pull their money out of banks and buy gold and foreign currency, instead.