Inflation and interest rates meet up

A quick look at the current situation of existing markets in the economy of Iran (such as banks, stock exchange, real estates, currency, gold and so on) and their ROI indicates that despite several years of lasting recession, banks are once again the most attractive market for investors. The monthly interest rates offered by the banks and other financial institutions ranging between 25 to 30% are still far above the rates afforded by alternative competing markets. In the final weeks of the previous Iranian year, the banks embarked on a gradual increase in their interest rates. The noticeable point was that the banks mainly increased the interest rates on short-term deposits in comparison to the medium or long-term ones. The reason, as experts argue, lies in people's tendency to go for short-term deposit schemes given the uncertainty prevailed in the economy and lack of confidence in the future. The development raised criticism among some government critics, a group of economists who had once ratified and enforced the rationalization of the interest rates scheme and monetary policy package under Ahamadinejad administration in 2010-2011 creating a huge gap between the interest rate and inflation in the country. This gap is known to have disturbed the balance in Iran's macro economy in the subsequent years. The experts further argue that the gap, on the one hand, caused the flight of bank deposits to other markets creating vulnerability in gold and foreign currency markets; and on the other hand, resulted in transfer of wealth from depositors to borrowers which could ultimately feed the growth of rents and corruption in commercial markets. Some economists and politicians oppose any increase in the interest rates when the economy is suffering inflation as they believe such a measure would in turn increase the interest rate on bank facilities and intensifies inflation. There is also another group of economists for the idea who argue that increasing the interest rate is a contractionary monetary policy which helps the liquidity reduce by pushing it towards banks. Interest rates have increased since the banks are concerned about losing their deposits in the future, as claimed by some experts. The same disagreement seems to exist among the members of the government's economic team. For example, those closer to industrial and production sectors believe that increasing the interest rates would increase the costs for raising funds for production projects. Therefore, they argued that under the existing recession the policy is not an optimal one. However, the investigations of the central bank on the share of capital and labor factors in production costs proved otherwise and highlighted that the role of interest rate in production costs is less than what is claimed. The consequences of this gap in destabilizing the macroeconomics imposed higher costs on the Iranian economy. There were officials who believed in the necessity of reforming the rate and balancing it with inflation; however, considering the 40% inflation rate and the vulnerable economic situation, any shock should be avoided until the economic variables reach a more sustainable level, ready for an economic reform. The investigations using the recent price trends and the stabilized low monthly inflation level in recent months show that the government may be able to adjust the inflation rate at 25% even earlier than the forecasted date (end of the current Iranian year), possibly already in August. Therefore, it seems possible for the inflation rate to reach 20% after such a long time. This means that the balance between interest rates and inflation rate might be achieved soon. In other words, it is eventually possible to overcome a lack of balance in macro economy and remove the gap between the price of money and the inflation by the end of current Iranian year.