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Dropping interest rates could increase inflation in Iran

While high interest rates continue to keep liquidity locked into bank deposits, a nonholistic approach to job creation could lead lower interest rates to simply result in the return of high inflation.
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TEHRAN, Iran — Real interest rates in Iranian money markets have risen to all-time highs under the administration of President Hassan Rouhani. This is due to the sharp reduction in inflation, which the administration boastfully declares as its cornerstone achievement. Nonetheless, the rise in real interest rates has mostly occurred on the back of lackluster growth given macroeconomic fluctuations both at home and abroad.

Economic growth remains hindered by the continuation of sanctions, the decline of oil prices and the government’s budget deficit. As for the financial sector, lenders’ excessive investment in housing, a surge in banks’ nonperforming loan ratios, a sharp increase in the money supply and the unfavorable role of unauthorized financial and credit institutions have all been fueling the war among lenders to attract liquidity. Combined, these issues have complicated the process of raising funding through the banking system and thus pressured lenders to offer high interest rates to attract depositors — even as they face asset depletion on their balance sheets.

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