The Central Bank of Iran trying to reduce interbank interest rates in the hope of realizing its inflation target, the governor Abdolnasser Hemmati said.
An inflation target of ±22% has been set by the CBI for the first fiscal quarter (March 20-June 21- 2021).
Speaking at state TV late on Sunday, Hemmati said the interbank rate must be cut to 18% from the present 20%.
He said decline in interbank rate is essential to realize the inflation target. "When an inflation target is set, it means that the central bank must consider some issues. One is the interbank interest rate that has to cut to around 18%," he was quoted as saying by IBENA, the news agency affiliated to the Monetary and Banking Research Institute.
"In fulfilling the target there could be some [unforeseen] factors, out of the central bank's will, which may affect inflation," he said. "We are very hopeful to bring down inflation.”
He pointed to the steep rise in foreign exchange rates as one factor hampering the CBI's effort to achieve its goal. "We set the target based on the assumption that the parity rate in the Nima market is around 170,000 rials to a dollar," he said, referring to the forex trade platform for exporters and importers affiliated to the CBI. Forex rates at Nima are now much higher than the CBI's estimations and hovering around 240,000 rials.
The high and rising forex rates were spurred by inflation expectations arising from the strained government budget, steep decline in oil export revenue and Covid-19, Hemmati said.
As per the Statistical Center of Iran, the average goods and services Consumer Price Index in the 12-month period ending Jan. 19 increased by 32.2% compared to the corresponding period last year.
Volatile Interbank Rate
Interbank rates were uneven in the past 10 months. The average rate was 18.95% last year (March 2019-20) before abruptly dropping to 10% in May. Interbank rates began to rise steadily in the months after to reach 23.2% in late October. It te was around 20% in the month to Dec. 20.
The CBI chief said the regulator has employed the open market operation (OMO) and its monetary instrument interest rate corridor (IRC) to bring down the rate to 20% and will tap the same monetary policy to further reduce rates.
Using bonds as collateral to borrow from the CBI and regulating interbank interest rates are key elements of the bank’s OMO. As a component of the OMO, the IRC is a mechanism under which the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.
Hemmati said the increase in money supply is another serious cause for CBI concern. "We are concerned about money supply growth. It should grow at a reasonable rate, not exponentially."
Despite concerted efforts to control money supply, it has grown in recent months "due mainly to inconsistent government budget structures and the unprecedented US sanctions.”
Broad money supply reached 31,300.2 trillion ($130 billion) at the end of third quarter of the current fiscal year on Dec. 20, indicating 38.4% Y/Y growth.
CBI figures show the amount was 2.2 percentage points higher than the first half of the year ending Sept. 21. Money supply jumped 26.6% since the beginning of the current fiscal year in March when it was 24,721.5 trillion rials ($103b).
The monetary base jumped from 3,142.6 trillion rials at the end of Q3 last year to 4,075.4 trillion rials ($16.9b) for the first nine months in the current fiscal year indicating 29.7% annual growth. It was 15.5% higher since the beginning of the year to Dec. 20.
