Towards a Reduction in Bank Interest Rates?

Radio Farda - Economic media in Tehran report a collective agreement among bankers to reduce bank interest rates in Iran. Reza Valizadeh has asked Fereydoun Khavand what this consensus means in the current situation and what consequences it may have. Fereydoun Khavand states that the interest rate, referred to as bank profit in Iran for religious reasons, is one of the most influential tools of economic policy. Two key macroeconomic indicators, inflation rate and growth rate, are affected by the bank interest rate. When a depositor places their assets in a bank, they request profit or interest in return. Banks, relying on these deposits, provide facilities to applicants and demand interest for this service. The level of interest rates depends on many factors, including inflation rates, the amount of deposits offered to banks for interest, and the amount of facilities demanded from banks. Currently, in a country like Switzerland, it is the depositor who pays interest to banks, as inflation in Europe hovers around zero percent and liquidity is abundant. In Iran, in 2013, inflation was about 35 percent, and naturally, the interest paid to depositors was high, but still below the inflation rate. In fact, depositors were losing money. Currently, the inflation rate is around 15 percent, and for this reason, bankers are calling for a reduction in bank interest rates, but the decision must be made by the Money and Credit Council; likely within the next few days. Can it be said that with a reduction in bank interest rates, investment in the country will increase and the economy will revive? This depends on the conditions; last year, due to the gradual decrease in inflation, there was significant pressure on the Central Bank to reduce interest rates. The Central Bank resisted these pressures because it feared that as soon as the bank interest rate was reduced, depositors would transfer their assets to the currency market, creating conditions for a renewed surge in the dollar price and subsequently an increase in inflation; as the shortage of currency had become problematic, especially given that nuclear negotiations were facing issues and oil prices were rapidly declining. Are the conditions really favorable for reducing bank interest rates in the country at present? In any case, the conditions are much more favorable than last year. There is great hope for a final resolution of the nuclear case, and considering the prospect of significant amounts of currency entering the country, the fear of a rush of deposits to the currency market and an explosion in the dollar price is not high. Nevertheless, it cannot be said that a reduction in interest rates will automatically lead to increased investment and economic growth. Some experts predict that a reduction in interest rates under current conditions will fuel the rise in housing prices.