Iran interest rate cut sparks panic selling

[muriel_volestrangler]

Source: Guardian

Iran's financial system suffered a fresh jolt yesterday with panic selling on the stock market after the president, Mahmoud Ahmadinejad, abruptly ordered banks to cut interest rates sharply, despite surging inflation.

The order, which Mr Ahmadinejad issued by telephone during a visit to Belarus and which flew in the face of expert advice - has triggered warnings of a financial crisis and spiralling corruption amid fears of a capital flight from the country's lending institutions.

Mr Ahmadinejad's decree forced all state-owned and private banks to slash borrowing rates to 12%. Inflation is officially 15% but is generally believed to be much higher. State banks had been offering rates of 14%, while those in the private sector ranged from 17% to 28%.

The decision caused panic in the Tehran stock exchange, with private banks losing much of their share value overnight. Shareholders in one bank, Karafarin, queued on Wednesday to sell their stock when previously there had been 1.2 million applicants to buy its shares.

Read more: http://www.guardian.co.uk/iran/story/0,,2087915,00.html

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And he also raised the price of petrol - from 4 to 5p per litre (ie now up to the giddy heights of about 37 cents per US gallon).

[1932]

1. High oil prices cause inflation in oil-producing countries. That's why Venezuela

is spending so much money on the bonds issued by neighboring countries.

I wonder if Iran being cut off financially from so much of the world makes it hard for them to address inflation.

[Possumpoint]

2. Learn About Your Opponent

Mr. Mahmoud Ahmadinejad is a deeply religious believer in the Shiite myth of the 12th Imam. Through this belief, he sees a coming conflict with Israel and the western countries in terms similar to the Biblical term Armageddon. Why should he care what destruction he does to the Iranian economy when he sees all out conflict coming? While he is in power, he will do whatever he can think of to promote the ascendancy of his Muslim beliefs. You also have to understand that he is a figure head. The true power in Iran are the ultra conservative Imams pulling strings from behind the scenes. You also have to understand that the Koran forbids interest on loans.

[1932]

3. Then why'd he lower interest rates rather than get rid of them?

And, incidentally, here is the more logical explanation (from the Guardian article):

The interest rate move theoretically helps the less-well-off, for whom Mr Ahmadinejad has pledged support with cheaper loans. But economists say cutting rates below inflation will scare investors into withdrawing their savings, thereby creating a black market in high interest loans. They also warn of higher inflation as investors redirect their money into property and push up house prices.

"Mr Ahmadinejad's argument is that the lower the interest rate, the more access people will have to money," said one analyst. "But you can't command interest rates down. They have to match inflation. To cut rates, the government has to balance its budget better."

Another economist, Saeed Leylaz, claimed the move was a reward to powerful groups who had supported Mr Ahmadinejad. "I believe the president knows the consequence of this decision but he doesn't care about the future."

"There are groups which helped put Mr Ahmadinejad into office and in my opinion, he is paying them back. In the last two years, the value of (outstanding) debts has reached US$11bn, compared with $3.5bn in the previous 100 years. Mr Ahmadinejad ordered the banks to pay these accelerated loans to the special groups. If you cut interest rates, it means they have less to pay back. You can imagine how disastrous this is to the banking system."

[Skink]

4. The economic hit men are at work.

[gravity]

5. Lowering interest rates below inflation is just stupid

especially for private banks.

This will make it so that there will be no loans, since banks have zero economic incentive to write them.

[fasttense]

6. But that is exactly what the US does.

The US government claims inflation is 3 to 5% which is not true. Just look at what the dollar is trading at. The current real inflation rate is about 7 to 13% depending on how you calculate it. Yet banks offer interest rates on savings at about 1 to 5.5%. Saving money is a waste of the money because it doesn't keep pace with inflation. I can get a loan right now for anywhere between 0 to 6%, which is 1 to 13% lower than inflation. Like in the US, Iran will simply discourage saving and encourage borrowing because Iranians will pay back loans with cheaper money.

[gravity]

7. Inflation is about 3%

You base the rate of inflation off your own currency, not some other country's currency.

There was a time when the federal discount rate was lower than inflation, but private banks kept their interest rates above the rate of inflation or else they would lose money if they made any loans.