Iran Currency Freefall Forces President to Allow Rise in Interest Rates

Facing a wave of panic selling by Iranians worried that international sanctions and inflation are destroying the value of the rial, Iran’s president reversed himself on Wednesday and allowed bank interest rates to rise sharply in an effort to stop a slide that has depressed the currency to a relentless string of record lows.
The decision by the president, Mahmoud Ahmadinejad, was an unusual about-face for the Iranian hierarchy, which has maintained a public stance of stoicism on the building sanctions, imposed in response to Iran’s suspect nuclear energy program. On top of four rounds of penalties by the United Nations Security Council, the United States, Europe and other allies have begun curtailing purchases of Iranian oil and limiting other financial transactions, increasingly isolating Iran economically to try to halt its uranium enrichment.
President Ahmadinejad in particular has said the sanctions will fail and that Iran is shrugging them off. He had long opposed the advice of economic advisers to raise bank interest rates to counter the rial’s declining value.
But he apparently changed his mind after panicked selling of rials for other currencies and gold by Iranian households and small investors, which increased dramatically on Monday, when the European Union announced its intention to stop buying Iranian petroleum. The semi-official Mehr News Agency said a flood of rials for sale had “thrown the markets into total disarray.”
The unofficial but widely followed foreign-exchange rate in Tehran has fallen to about 23,000 rials to the dollar, compared with about 18,000 to the dollar last week and 11,000 to 12,000 to the dollar in December — a roughly 50 percent drop over a month. The weakened rial means Iranians must pay far more for a range of goods, especially imports.
Under the policy change, announced by Shamseddin Hosseini, the economics minister, President Ahmadinejad “agreed to a decision by the Money and Credit Council to increase interest on interest bearing accounts.”
The rates will rise to 21 percent, up from the current 12.5 percent, to encourage people to put their rials in the bank instead of selling them. Still, it was unclear if the move would ease anxiety among ordinary Iranians.
Private economists had said Iran would have to raise interest rates sharply — to at least a level higher than the current official 20.6 percent inflation rate — in order to ease the selling pressure on the rial.
But the inflation rate is believed to be far higher than the official number, a reality hinted at by the Mehr News Agency account of the policy change, which said “commodity prices have been galloping up in recent days as gold and foreign currency prices have increased incredibly.”
The policy change also appeared to be an acknowledgment that the disruptions to Iran’s economy because of the sanctions, and Mr. Ahmadinejad’s apparent inability to manage them effectively, could turn into a domestic political issue in the March 2 parliamentary elections.

Artin Afkhami contributed reporting.