Ahmadinejad raises interest rates in Iran

Iranian president Mahmoud Ahmadinejad has finally agreed to increase interest rates to 21 per cent, reversing his opposition to the move economists said was crucial to supporting the Iranian currency.

After weeks of criticism over his inaction, President Mahmoud Ahmadinejad approved a decision by monetary authorities that would raise the interest rates on bank deposits to roughly 21 percent, the official IRNA news agency reported, quoting Economic Minister Shamseddin Hosseini.

The move was a reversal of his earlier opposition to the decision by Iran's Money and Credit Council that would have boosted the interest rates to a level above the inflation rate. Economists said such a step was crucial to absorbing market liquidity and buoying the rial.

Banks would be instructed to enact the new rates starting Thursday, Hosseini said.

The market reacted to the announcement immediately, with the rial trading at 19,000 rials to the dollar within hours of Hosseini's remarks.

Ahmadinejad's refusal to sign off on the council's decision stoked a rift between fiscal authorities and the president, with Central Bank Gov. Mahmoud Bahmani warning earlier in the month he may quit if the government continues to interfere in shaping monetary policies and does not approve an increase in bank deposit interest rates.

Bahmani was quoted on state television on Wednesday as saying that a single foreign currency rate will be offered within the next 48 hours as part of the central bank's measures to stabilize the currency exchange market.

Analysts say that the main reason behind the currency's depreciation was a decision to lower interest rates on one-year deposits to 14 percent from 17.5 percent. The rate cut prompted Iranians to pull their money out of banks and buy gold and foreign currency, instead.

The EU embargo, announced on Monday, was the latest attempt to try to pressure Iran over a nuclear program the United States and its allies argue is aimed at developing nuclear weapons but which Iran says is for purely peaceful purposes. It came just weeks after the US approved, but has yet to enact, new sanctions targeting Iran's Central Bank and, by extension, its ability to sell its oil.

Many Iranian lawmakers and officials have called for an immediate ban on oil exports to the European bloc before its ban fully goes into effect in July, arguing that the 27 EU nations account for only about 18 percent of Iran's overall oil sales and would be hurt more by the decision than Iran. China, a key buyer of Iranian crude, has blasted the embargo.

“The bill requires the government to stop selling oil to Europe before the start of European Union oil embargo against Iran,” lawmaker Hasan Ghafourifard told the parliament's website, icana.ir. Debate on the bill is to begin on Sunday, he said.

The US sanctions had outraged Iranian officials, prompting repeated threats from various officials that the country could shutter the vital Strait of Hormuz if measures are enacted that affect its oil exports. Roughly a fifth of the world oil passes through the narrow waterway, and the US and others have warned Iran they will not allow it to impede the free flow of traffic in the area.

Iran is OPEC's fourth largest producer and most of its crude goes to Europe and Asia.

Iranian officials have said the sanctions will have no effect on the economy and they will find other willing buyers. Analysts and diplomats also have played down the likelihood that Iran will actually move to close the strait — a step that could bring it into direct conflict with US and other Western naval and ground forces stationed in and around the Persian Gulf.

“The door to dialogue remains open for Iran,” German Foreign Minister Guido Westerwelle said in Berlin Wednesday. “But it also is clear that we in the world cannot accept Iran's government reaching for nuclear weapons. So the sanctions are necessary.”

“If they are applied comprehensively and supported by as many as possible in the world, that makes the probability of success all the greater,” Westerwelle said after meeting his Australian counterpart, Kevin Rudd.

The sanctions debate comes at a time when the country's economy and currency are under increasing pressure following a series of other economic sanctions that already have been imposed.

The rial has shed about 50 percent of its value relative to the dollar over the past month, a decline that the central bank governor, in a moment of rare candor, attributed at least partially to the “psychological effects” of the US sanctions. The currency, which was trading at 15,000 rials to the dollar on the black market at the start of the year, hit a record low of 22,000 rials to the US currency by the weekend.

AP