Iran considers interest hike to fight inflation

DUBAI Tue Oct 22, 2013 12:07pm EDT

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DUBAI Oct 22 (Reuters) - Iran is considering an interest rate hike to fight high inflation, a senior official was quoted as saying, in a sign that the government of newly elected President Hassan Rouhani plans economic policy changes.

Mohammad Nahavandian, a member of the Money and Credit Council, said a rise in interest rates was being studied although the central bank would have to move carefully because the economy was so weak, the Tehran Times reported, citing the semi-official Mehr news agency.

"Currently, the country is grappling with inflationary recession, so that it is not possible to change the rates swiftly," Nahavandian was quoted as saying.

The Money and Credit Council, which includes the central bank governor, economic ministers and other members, helps to set monetary policy.

The government of Rouhani's predecessor, President Mahmoud Ahmadinejad, was widely criticised in parliament and the private sector for erratic economic management as Iran grappled with Western financial sanctions imposed over its disputed nuclear programme.

Ahmadinejad's critics said a jump in annual inflation to around 40 percent partly reflected wasteful state spending and a failure by the central bank - under political pressure from the government - to keep money supply growth under control.

After taking office on Aug. 3, Rouhani promised to improve economic management and appointed a new central bank governor, Valiollah Seif, who called for "disciplined financial practices".

A veteran commercial banker, Seif has said that ideally interest rates should not be lower than inflation. Iranian banks currently offer one-year deposit rates of around 18 percent, suggesting ample room to bring rates closer to inflation.

The Tehran Times quoted Seif as saying earlier that Rouhani had agreed to give the central bank more independence to focus on controlling inflation and the money supply.

But with the economy in recession because of the sanctions, any tightening of monetary policy is likely to be gradual and limited.

Parliament and Rouhani's administration are expected to reach an agreement by the end of the current Iranian calendar year in March to cut the cash subsidies given by the government to relatively well-off families, the newspaper quoted Seif as saying this week.

Reducing subsidies would be politically sensitive but could help to ease inflationary pressures further by cutting the amount of money flowing around the economy. It would also help limit the country's budget deficit.

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