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