Economy, Business And Markets

Keep Calm and Carry on “Monetary Discipline”

Keep Calm and Carry on “Monetary Discipline”Keep Calm and Carry on “Monetary Discipline”

The Central bank governor outlined his bank’s strategy and targets for the upcoming year (starting March 21).

Valliolah Seif told the press on Wednesday that his bank will continue its “monetary discipline” strategy to fortify the banking system and bring inflation down to a single digit.

“We will carry on controlling the expansion of money supply, better its makeup and guide financing towards productive activities,” he said.

The Central Bank of Iran’s strategy will be one of maintaining “stability” in various asset classes, namely foreign exchange and housing, Seif added.

CBI’s approach coupled with restrained fiscal spending during the current fiscal year ending March 20, caused inflation to drop to 15.8 percent for the month ending Feb. 19, from 34.7 percent in March 2014. The bank will continue the strategy.

Contrary to some analysts who expect inflationary pressure to increase due to increased lending by commercial banks in the current year, the governor said that 60 percent of the lending by commercial banks was used to provide cash flow; in turn reviving morbid parts of the economy that were hit by the recession in the two previous years.

Though lending inevitably increases inflationary pressures, inflation directly stems from money supply and not lending; and “not only was there a contraction in money supply during the current year,” but also there has been a shift in its makeup from monetary base towards the money multiplier. Thus, Seif expects the declining trend of inflation to continue.

“The stability of foreign exchange rates despite the shocks of failure to reach a comprehensive agreement with the West and plunging oil prices are owed to the prudent management of the foreign exchange market.”

The US dollars 12-month average market rate edged up 0.6 percent to 32,498 rials in the year ending March 20, 2015, from the previous year’s 32,289 rials, according to the CBI.

The governor also said that the economy has indeed grown four percent in the first two quarters of this year, after eight consecutive quarterly contractions. He added that all economic sectors have grown this year.

When asked if the CBI had any plans for reducing unemployment, Seif said if conditions are right in the real economy, the banking system’s lending can help reduce unemployment. The central bank’s main objective is to “guide resources towards immobilized parts of the economy. Nonetheless, transformation of the job market and reduction of unemployment requires mobilizing all foreign and domestic resources, especially the capital market.”

The central bank is also assessing various plans for the revival of the housing market due to its importance in economic growth, said the CBI governor.