The Central Bank of Iran needs to concoct intermediate policies to be able to adjust to negative supply shocks and control monetary supply, the bank’s governor said.
Speaking on state TV late Monday, Abdolnasser Hemmati reflected on reasons why the regulator refused to adopt contractionary monetary policy and increase interest rates to control inflation.
Contractionary monetary policy is driven by increase in base interest rates controlled by central banks or other means producing growth in the money supply. The goal is to reduce inflation by limiting the amount of active money circulating in the economy.
The senior banker said any monetary policy to curb inflation must include controlling money supply plus measures to cope with supply shocks that push up prices.
"If the only reason for high inflation was [expanding] money supply, then we could adopt measures to curb it. Now we are facing inflation that [also] is from supply shocks, which demand special control measures," IRNA quoted him as saying.
A supply shock is an unexpected event that changes the supply of a product or commodity, resulting in a sudden change in price. A positive supply shock increases output causing prices to decline, while a negative supply shock decreases output causing rise in prices.
Hemmati pointed to the weak balance sheets of banks that “could exacerbate if interest rates rise.”
In addition, the CBI has concerns about the likely impact of high interThe Central Bank of Iran needs to concoct intermediate policies to be able to adjust to negative supply shocks and control monetary supply, the bank’s governor said.
Speaking on state TV late Monday, Abdolnasser Hemmati reflected on reasons why the regulator refused to adopt contractionary monetary policy and increase interest rates to control inflation.
Contractionary monetary policy is driven by increase in base interest rates controlled by central banks or other means producing growth in the money supply. The goal is to reduce inflation by limiting the amount of active money circulating in the economy.
The senior banker said any monetary policy to curb inflation must include controlling money supply plus measures to cope with supply shocks that push up prices.
"If the only reason for high inflation was [expanding] money supply, then we could adopt measures to curb it. Now we are facing inflation that [also] is from supply shocks, which demand special control measures," IRNA quoted him as saying.
A supply shock is an unexpected event that changes the supply of a product or commodity, resulting in a sudden change in price. A positive supply shock increases output causing prices to decline, while a negative supply shock decreases output causing rise in prices.
Hemmati pointed to the weak balance sheets of banks that “could exacerbate if interest rates rise.”
In addition, the CBI has concerns about the likely impact of high interest rates on the stock market. "We have to take care of the capital market given its role and significance in contributing to the economy," Hemmati said.
In recent weeks, the bourse has seen more than its fair share of volatility following rumors about the CBI's intention to increase interest rates. This negatively impacted the already nervous share market as investors feared massive capital outflows.
As for the third reason behind the CBI's aversion to higher interest rates, Hemmati linked it to the need to extricate the economy from recession that has hurt businesses of all stripes, downed shutters and wiped out millions of jobs in three years.
Higher deposit rates run the risk of undermining production. In other words, credit lines are channeled to banks instead of lifting manufactures.
"We understand that controlling inflation is crucial, but under the present economic conditions an intermediate policy is a compulsion.”
Last month some banks and credit institutions arbitrarily offered up to 20% on deposits giving rise to speculation that the CBI has given a green light to higher interest rates.
Economy Minister Farhad Dejpasand later denied plans to increase rates and asked banks and credit institutions to abide by the interest rate caps announced by the Money and Credit Council, the top monetary decision making body.
The move was also rejected by the Hemmati at that time. He argued that raising deposit rates was unlikely to work in light of supply crunch in the currency market, banks’ weak balance sheets and the government’s increasing demand for funds. He said the CBI would do better to curb inflation by "using other tools".
The MCC slightly raised deposit rates in July. It increased interest on one-year maturity deposits by 1 percentage point to 16%. Likewise, interest on two-year deposits was set at 18%. On short-term deposits with 3-month maturity, the rate increased by 2 percentage points to 12%. MCC approved 14% interest rate for six-month deposits, up 3 percentage points.
est rates on the stock market. "We have to take care of the capital market given its role and significance in contributing to the economy," Hemmati said.
In recent weeks, the bourse has seen more than its fair share of volatility following rumors about the CBI's intention to increase interest rates. This negatively impacted the already nervous share market as investors feared massive capital outflows.
As for the third reason behind the CBI's aversion to higher interest rates, Hemmati linked it to the need to extricate the economy from recession that has hurt businesses of all stripes, downed shutters and wiped out millions of jobs in three years.
Higher deposit rates run the risk of undermining production. In other words, credit lines are channeled to banks instead of lifting manufactures.
"We understand that controlling inflation is crucial, but under the present economic conditions an intermediate policy is a compulsion.”
Last month some banks and credit institutions arbitrarily offered up to 20% on deposits giving rise to speculation that the CBI has given a green light to higher interest rates.
Economy Minister Farhad Dejpasand later denied plans to increase rates and asked banks and credit institutions to abide by the interest rate caps announced by the Money and Credit Council, the top monetary decision making body.
The move was also rejected by the Hemmati at that time. He argued that raising deposit rates was unlikely to work in light of supply crunch in the currency market, banks’ weak balance sheets and the government’s increasing demand for funds. He said the CBI would do better to curb inflation by "using other tools".
The MCC slightly raised deposit rates in July. It increased interest on one-year maturity deposits by 1 percentage point to 16%. Likewise, interest on two-year deposits was set at 18%. On short-term deposits with 3-month maturity, the rate increased by 2 percentage points to 12%. MCC approved 14% interest rate for six-month deposits, up 3 percentage points.
