April 18, 2015 / 4:30 PM / 4 years ago

Iranian banks agree to cut rates after inflation plunge

DUBAI, April 18 (Reuters) - Iranian banks agreed on Saturday to cut deposit and lending rates, the head of Iran’s largest commercial bank said, after a sharp fall of inflation gave policymakers more room to pursue faster economic growth.

“The directors of state and private banks today agreed...to reduce the one-year deposit rate to 20 percent,” the semi-official Mehr news agency quoted Abdolnaser Hemmati, managing director of state-run Bank Melli, as saying.

Lending rates were also cut by between 2 and 3 percentage points in response to the drop of inflation, statements by Iranian President Hassan Rouhani and the views of the economy minister and central bank governor, he said.

The changes will take effect on May 5 subject to the approval of the central bank. One-year deposit rates are currently capped at 22 percent under a similar agreement reached last year.

With tighter monetary and fiscal policy, Rouhani’s administration has brought annual inflation down to 15.6 percent from over 40 percent two years ago. Saturday’s rate decision suggests authorities now believe the fight against inflation is largely won.

The foreign exchange market may also be a factor in the rate decision. Tehran reached a preliminary agreement with world powers early this month on curbing its nuclear programme; if a final deal is reached by a June 30 deadline, economic sanctions on Iran will be lifted.

This could encourage the public to start releasing into the market large amounts of hard currency - perhaps billions of dollars - which it hoarded during the sanctions era. That could push the free market rate of the rial up sharply, and officials have said they do not want to see sharp rial appreciation because it could hurt Iranian exporters.

Iran’s economy grew 2.8 percent from a year earlier in the third quarter of the fiscal year that began on March 21, 2014, according to central bank data, too slowly to bring down high unemployment or raise living standards damaged by years of sanctions. (Editing by Andrew Torchia)

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