Rooyesh

While Iran struggles under increasing punitive measures implemented by the international community and unilaterally by the US, the country’s self-inflicted damage to the economy continues with the latest decree to slash interest rates that will stoke already rampant inflation. The interest rate cuts ordered by Iranian President Mahmoud Ahmadinejad in May is akin to adding fuel to a raging fire and have led us to revise our inflation forecast up to 20.0% y-o-y for 2007. Indeed, the consumer price measure of inflation (CPI) came in at 17.6% y-o-y in January-February (the Iranian month of Bahman); a result of the president’s spending splurge, the inflow of petro-dollars and rampant money supply growth - 39.4% y-o-y in 2006 according to the Central Bank of Iran.

CPI was 6.5% y-o-y in the first month of the last Iranian calendar year, March-April, 2006 (Farvardin 1385). Producer price inflation has also followed a similar course, having more than doubled according to the latest figures, jumping from 6.4% y-o-y in March-April 2006, to 15.7% y-o-y in February-March (Esfand) this year. In addition to this, following years of delays, the decision to implement fuel subsidy cuts in May, raising retail prices by 25%- though Iranian gasoline prices remain one of the lowest in the world - will also contribute to the upward trajectory of prices throughout the economy. Estimates suggest around 10% of its oil export revenues were spent on importing gasoline last year. Further plans to ration gasoline, by forcing consumers to pay more for purchases above a set quota, have been delayed, and it is possible that this may prove far too unpalatable politically to implement in the near future. The president has been keen to lower interest rates having campaigned on a platform to spread the oil wealth to the masses and provide cheap credit. He has faced resistance by the Money and Credit Council of the nominally independent central bank and even the economy minister, but has opted to ignore such advice. Last year the government blamed to media for high inflation in response to criticism of his handling of the economy. This is not the first time he has decreed rate cuts - in 2006 rates for state-owned banks were slashed from 16% to 14% and 22% to 17% for private banks. The latest decree brings both rates down to 12%. Rather than boost investment and control inflation as the government argues, such imprudent policies are certain to have the opposite effect by adding to inflationary pressures and damaging investor confidence - there are already reports of panic selling at the Tehran Stock Exchange (TSE) - and hence general economic activity. As such, we concur with the view expressed by the former head of the TSE that ‘this ad-hoc decision will not benefit the investment market at all and will only terrify investors’. Source: Business International Monitor