Iran hikes bank interest rate to 21% to buoy rial

Immediate positive reaction from market

Gulf News

Tehran: Iranian President Mahmoud Ahmadinejad has approved increasing bank interest rates to 21 per cent, state media reported yesterday, in a reversal of his earlier opposition to a move economists said was crucial to absorbing liquidity in the market and supporting the Iranian currency.

The move came as the rial, under pressure after new US sanctions targeting Iran's Central Bank, shed about 50 per cent of its value relative to the dollar in the span of a month.

The depreciation built on mounting worries over Iran's growing international isolation over its controversial nuclear programme. The European Union earlier this week approved an embargo on Iranian crude.

Ahmadinejad has resisted a decision by Iran's Money and Credit council to raise interest rates — a move analysts and economists said was necessary to sap excess liquidity from the market and encourage Iranians to deposit money in banks instead of buying hard currency in the black market.

Record low

While Iranian officials sought to stem the rial's depreciation through a host of restrictions, including setting a new official exchange rate and banning the buying of foreign currency outside of licensed currency changing venues, the moves did little to allay concerns in the market.

The rial, which was trading at 15,000 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.

The market reacted to the announcement immediately, with the rial trading at 21,000 to the dollar within an hour.