Rate Cuts to Boost Lending

Iraq’s central bank slashed its base rate by 100 base points to six per cent as of April 1 in reaction to subdued inflation and to boost bank lending, senior advisers at the bank said.

The bank’s website said that the rate cut – the first in nine months – was effective as of April 3.

The bank has also cut banks’ reserve requirements to 20pc from 25pc, a central bank adviser said.

The rate move reflects the bank’s policy of keeping real interest rates two points above core inflation, officials said.

One adviser said the central bank had decided to cut minimum reserve requirements for private banks, which was also aimed at boosting lending to lift the Iraqi economy.

The IMF forecasts economic growth of 7.3pc this year, accelerating from estimated 4.2pc growth last year but well off the  9.5pc growth in 2008 when oil prices were at record highs.

The official interest rate in Iraq is more of a guide to bank rates than a direct monetary mechanism as the banking sector is small and capital markets are undeveloped. In addition, the exchange rate is determined by the central bank at regular currency auctions.

“One of the reasons (for the rate cut) is to encourage banks to lend to traders and investors,” adviser Hassan Al Haidari said.

The central bank last cut its interest rate, by 200 basis points, last June to 7pc. Mudher Kasim, also a senior adviser at the central bank, said that the bank had lowered minimum reserve requirements for private banks to 20pc from 25pc.

“This will give liquidity to the banks … to encourage investment,” he said.

( Gulf Daily News )

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