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US Fed Reserve to make Iran choose next monetary policy

Business Materials 16 December 2016 10:02
The US Federal Reserve’s recent decision to raise the interest rates by a quarter-point from 0.50 percent to 0.75 percent sets Iran in front of two possible ways regarding its future monetary policies.
US Fed Reserve to make Iran choose next monetary policy

Baku, Azerbaijan, Dec. 16

By Farhad Daneshvar – Trend:

The US Federal Reserve’s recent decision to raise the interest rates by a quarter-point from 0.50 percent to 0.75 percent sets Iran in front of two possible ways regarding its future monetary policies.

Although Fed chairwoman Janet Yellen has described the rise as a "modest shift", the Dec. 14 decision appears to have a major impact on Iran’s political and economic landscape.

As the federal decision strengthens the US dollar index, the Central Bank of Iran and President Hassan Rouhani’s government, under the first scenario, may decide to protect the value of the country’s national currency (rial), at the expense of the domestic producers.

On the other hand, the Islamic Republic’s policymakers could go on with a second scenario, which is turning a blind eye to the further devaluation of the national currency, focus on climbing out of the continuing recession, at the same time battling the rising inflation.

Domestic production

“The last night’s decision caused a plunge in gold prices while other commodities were also expected to witness a decline. In the meantime, oil
demonstrated a slight drop in the international market,” Alireza Kadivar, a financial analyst and deputy head of Iran’s Novin Investment Bank, told Trend.

“While there is an inverse relationship between the value of the US dollar and commodity prices, Iranian economy largely relies on commodities as the country is a producer and exporter of crude materials.

Therefore, if the prices of commodities in the international markets drop, the country’s monetary decision makers should allow the value of the national currency go down against the US dollar,” he said.

Otherwise, any adopted policies aimed at protecting the value of rial against the dollar would inflict harm on the country’s economy and industrial producers, Kadivar argued.

If the government fails to devaluate the national currency, the Iranian administration’s revenues in rial will also decrease and Iranian producers will lag behind their rivals in international markets, he said.

Protecting the value of rial against the dollar implicitly means building up support for importers, the analyst concluded.

Inflation rate

The Iranian government and the Central Bank are capable of protecting the value of rial in short and medium terms, as a large part of the flow of the dollar into the country is carried out through the Central Bank itself and government companies, after selling oil and petrochemicals in the international markets.

In an interview with Trend, Hossein Khezli Kharazi, CEO of Iran's Bank Keshavarzi Securities Company, forecasted that the Central Bank would
protect the value of rial, saying that the dollar price has recently witnessed a considerable surge in the domestic market so the further devaluation of the national currency is unlikely.

The value of US dollar against rial has witnessed a dramatic surge in the country’s free market over the past couple of weeks increasing by at least 2,616 rials to reach 39,200 rials on Dec.15.

While further surge in the dollar prices means a surge in the inflation rate in the country, President Hassan Rouhani’s government has done well in tackling the galloping inflation rate in the country over the past year, but Iran’s economy still suffers from recession.

When Rouhani took office in 2013 the inflation rate was somewhere above 30 percent, which over the current year dropped to single digits (9.5 percent)
for the first time in a quarter century, a landslide victory for Rouhani's administration which will benefit the incumbent president during the upcoming presidential election next year.

Now the president and his administration have to decide whether to keep the inflation rate low, which will help him during the presidential election, or let the inflation rate edge up in order to beat the deepening recession.

Considering the fact that the oil prices have recently experienced a considerable hike, the government is technically capable of suppressing the US dollar prices as its revenue from oil is expected to grow.

According to Trend's observations, the OPEC basket price has seen a 15 percent surge over the current month.

Therefore the government ahead of the upcoming election may suppress the value of dollar in the domestic market in order to confront the inflation rate.

On the other hand, a true economic decision would help the country to climb out of the current recession, as slight increase in inflation rate will strengthen the domestic producers against their international rivals as well as increasing the government’s revenue which would help the administration to cover the budget deficits.

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