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Cablegate: Iraq's Central Bank Lowering Policy Interest Rate

VZCZCXRO5625
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0530 0550632
ZNR UUUUU ZZH
R 240632Z FEB 08
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 5877
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS BAGHDAD 000530

SIPDIS

SBU
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN EINV ENRG
SUBJECT: IRAQ'S CENTRAL BANK LOWERING POLICY INTEREST RATE
AS INFLATION SLOWS

1. (SBU) The Central Bank of Iraq (CBI) is continuing to drop
the policy interest rate as inflation slows, announcing
February 22 that as of March 2 its main policy rate would
decrease from 19 to 17 percent. The CBI cited the drop in
core inflation (which does not include energy prices) from a
30 percent increase in 2006 to "around 10 percent" for
January year-on-year. The CBI,s decision follows an earlier
decrease on January 22 from a 20 to 19 percent; a move the
CBI also justified by citing a slowdown in core inflation (12
percent for 2007). The CBI suggested that inflation was
decreasing not just as a result of effective monetary policy,
but also due to improved security and supply conditions.
This action is in line with the Memorandum of Economic and
Financial Policies included in the December 2007 Stand By
Arrangement (SBA) with the IMF.

2. (SBU) The cut is a sign of increased GOI confidence that
its policies of the past two years have brought inflation
under control. In response to the steady climb of inflation
in 2005 and sharp acceleration in 2006, the CBI raised its
Policy Rate from 12 to 16 percent in October 2006, and then
to 20 percent in December 2006. The CBI also curbed
liquidity by gradually appreciating the dinar approximately
17 percent against the dollar starting in September 2006 and
continuing through the present. Finally, in August 2007 the
CBI increased its required reserve ratio on government
deposits
from 25 to 75 percent in order to draw up excess liquidity
from government deposits in commercial banks.

3. (SBU) CBI Governor Sinan Shabibi told EMIN February 23
that the CBI will be watching closely to see if the policy
rate cuts lead to an increase in banking activity. He said
the CBI stands ready to make further reductions as long as
inflation remains moderate.

4. (SBU) COMMENT: This further decline of the CBI Policy Rate
signals continued loosening of CBI's tight monetary Policy.
It is a positive step towards monetary stability, and
represents a calibrated monetary policy that could increase
the base for domestic lending. Inflation is not quite out of
double-digit territory yet because month-on-month (m-o-m)
core inflation rates continue to
increase (in January 1.8 percent, December 0.7 percent, and
November 1.3 percent). Moreover, headline
inflation that includes the fuel prices is higher rate:
m-o-m in January 3.4 percent, and December 0.8 percent. And
it is fuel prices that are a major drain on the average
Iraqi,s pocketbook. The key indicator on inflation will
likely be apparent only during the summer months, as seasonal
data indicates a tendency toward increases in the second half
of the year. It will be important, therefore, for the CBI to
continue a careful and graduated approach to monetary policy
in order to prevent a
significant reversal. END COMMENT.
CROCKER

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