* Rate hike aimed at reversing dash for dollars, gold
* Iran's rial plummeted in value over sanctions fears
* Ahmadinejad policy U-turn ahead of parliamentary elections
* Central bank to restrict foreign currency sales
By Mitra Amiri and Robin Pomeroy
TEHRAN, Jan 25 Iran increased bank
interest rates on Wednesday and indicated it would further
restrict sales of foreign currency, hoping to halt a spiralling
currency crisis after new Western sanctions accelerated a dash
for dollars by Iranians worried about their economic future.
"The economy minister has announced that (Iranian President
Mahmoud) Ahmadinejad has agreed with the approval of the Money
and Credit Council to increase interest rates on bank deposits
to up to 21 percent," the official IRNA news agency reported.
The central bank also told Iranians they should only buy
dollars if they are travelling and not hoard them to guard
against economic uncertainty.
New U.S. and European sanctions targeting Iran's vital oil
exports and its central bank seriously exacerbated a slide in
the Iranian currency that was already under way, creating what
one senior politician described as economic instability not even
witnessed during Iran's 8-year war with Iraq in the 1980s.
The West hopes the economic pressure will force Iran to curb
the nuclear work they fear is aimed at making bombs but which
Tehran says is entirely peaceful.
The rial started weakening after a decision last April to
cut interest paid on bank deposits to a range of a 12.5-15.5
percent, below inflation which is currently around 20 percent,
prompting many Iranians to withdraw savings and buy gold and
foreign currency and pushing up the price of both.
The dash for those safe havens accelerated sharply after the
new sanctions were announced, resulting in the rial losing 50
percent of its value against the price of dollars available on
the open market in just one month.
Monday's decision marks a policy U-turn for Ahmadinejad, who
faces a political test in March 2 parliamentary election. He
previously vetoed efforts by Central Bank Governor Mahmoud
Bahmani to increase rates.
Bahmani indicated the rate increase would be accompanied by
further restrictions on the sale of foreign currency.
"We will provide foreign currency in any amount for people
demanding it for various uses," he said in an interview
published on the website of state broadcaster IRIB.
"Travellers, university students and patients will be
supplied at an appropriate rate," he said. Importers of vital
goods would also be able to buy as much foreign currency as they
"The government will not give foreign currency for storage,"
he added, implying that Iranians will no longer be allowed to
exchange their rials for hard currency unless they can prove an
The rial's slide is a huge risk to already rising inflation
as Iran is heavily reliant on imported consumer and intermediate
goods whose prices have surged as the rial has depreciated.
"Even during the war we did not witness such instability,"
Alaeddin Boroujerdi, head of parliament's foreign affairs
committee, told the semi-official Fars news agency.
"Government officials and the president himself should
definitely be held accountable to people and public opinion."
Ahmadinejad's representative in parliament - which is
already highly critical of the president and may become more so
after March 2 - said the new policy would burst what he called
the bubble of gold and dollar prices.
"The effects of the new decision will be clear in the market
very soon and the bubbles being created for foreign currency and
gold will be removed," the ISNA news agency quoted Mohammad Reza
Mirtajedini as saying.
The deputy head of parliament's economics committee
criticised the government for reacting late to the crisis which
he said had "no reasonable, logical basis".
"Increasing the bank deposit interest rates is an
appropriate tool for people's investments but doing it in a
hasty manner and the current inflamed situation of the market
will not solve any problem," Mostafa Motavarzadeh told the
semi-official Fars news agency.
The price of 8.133-gram gold coins dropped on the news,
local media reported, to 8,500,000 rials, reversing most of last
week's 45 percent increase when the price rose to 10,100,000.
The effect on the price of dollars was negligible however
with ISNA saying the price had fallen on the news to 22,500
rials from 23,000 rials - still double the central bank's
official "reference rate" of 11,293 rials.
However, exchange agencies contacted by Reuters said they
had no dollars to sell, reflecting either a shortage of notes or
a reluctance to sell in such a volatile atmosphere.