SHABIBI: CENTRAL BANK LIKELY TO LOWER INTEREST RATES

Date: Tuesday, January 19, 2010, 6:17 PM

TOKYO, Jan 19 (Reuters) - The Iraqi central bank is likely to lower interest rates from their current 7 percent, but the extent of any cuts will depend on inflation, the bank's governor said on Tuesday.

Sinan al-Shibibi also told Reuters Television in Tokyo that he does not expect any major disruption to the country's economy from an upcoming election in March, seen as a crucial test for Iraq as it tries to pull away from the bloodshed that followed the 2003 U.S.-led invasion.
The central bank brought down interest rates to 7 percent from 9 percent last June in line with a fall in inflation.

"Probably they are going to be lower than 7 percent. But of course this will depend on inflation vis-a-vis growth." he said. "We'll have to monitor very closely."

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.

"Monetary policy will follow developments in inflation," Shibibi said, adding that the central bank has managed to bring down inflation using monetary policy.

Inflation has come down to around 6.0 percent, Shibibi continued. Though volatile, core CPI inflation was 9.2 percent at the beginning of last year.

Shibibi said the Iraqi economy, driven mainly by oil production, is expected to grow a little bit more than the IMF's projection of 5.8 percent this year, shrugging off concerns about security ahead of the March 7 election.

The government of Shi'ite Muslim Prime Minister Nuri al-Maliki is seeking re-election but the country is still dogged by sectarian violence.

"It (violence) will die down once the economy grows more and income levels increase," Shibibi said.

(Reporting by Kei Okamura and Hideyuki Sano; Editing by Joseph Radford)

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