Governor of Central Bank of Iran is hopeful that the inflation rate could be brought down to around 22% with the help of new monetary policies.
Speaking on state TV late Tuesday, Abdolnasser Hemmati pointed to the interbank interest rate as one key factor in inflation.
He noted that the interbank interest rate has been declining in the past months.
“Interbank rate now is 16.5%, which is an important sign of inflation… I am very hopeful that we control inflation rate around 20%-22%,” he said, arguing that a declining interbank rate should curb inflation.
Interbank rate is the rate of interest charged on short-term loans between lenders. Such loans mature in one week or less, the majority being overnight.
Interest rates for interbank lending averaged 19.47% in fiscal 2018-19, up 5% compared to the year before. The rate declined to 17% by the end of last January.
Despite discrepancies between inflation data provided by official sources, inflation was around 41% in the last fiscal year that ended in March.
The annual Consumer Price Index calculated by the Statistical Center of Iran was 34.8%, whereas according to the CBI it grew to 41.2%. The CBI’s version of the rate was close to the International Monetary Fund’s estimation of 41.1% in 2019.
While the IMF has forecast improvement in economic indicators in Iran in 2020, its estimated inflation rate does not match the inflation target stated by the CBI boss.
Based on IMF projections, consumer prices in Iran would drop to 34.2% in 2020 and 33.5% in 2021.
Monetary Policy
Hemmati said the CBI has a plan of action plus monetary instruments to realize its inflation targets.
He underscored the role of the open market operation in regulating interest rates in the interbank market and similar measures to control the ballooning liquidity and forex rates to tame inflation.
OMO became operational in January as part of CBI policy to reduce banks’ dependence on the regulator and help curb inflation. It enables lenders to better manage their liquidity needs and offer their surplus liquidity on the interbank market.
OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.
Within this framework, central banks can buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates. By the same token, selling government bonds reduces the base money and raises interbank rates.
Liquidity in Iran crossed 22,623 trillion rials ($142 billion) last December, according to CBI data -- 28.2% growth year-on-year
To control rampant liquidity growth, economic policy and decision makers have pinned hope on the stock market to absorb a significant portion of the liquidity and avoid its flow into parallel markets, notably the permanently chaotic currency market.
Pointing to the new appeal of the stock market, Hemmati said the central bank supports expansion of the stock market, adding that the Ministry of Economy is determined to expand and improve the bourse by listing more companies.
He stressed the urgency to reduce the dependence of businesses on banks for funds and instead empower the stock market’s role and influence in funding issues.
Data suggests the need for expanding the stock market’s ability and willingness to meet the funding needs of businesses.
A report by Tehran Chamber of Commerce, Industries, Mines and Agriculture says the capital market’s contribution to financing businesses, in percentage terms, increased from 5.1% in 2018 to 12.7% in mid-2019.
