Economy, Business And Markets

Money Supply Expands 22%

Money Supply Expands 22% Money Supply Expands 22%

Total money supply continued its expansion in the first quarter of the current Iranian year—starting 21 March, 2015—as the central bank's expansive monetary policy continued.

Iran's total money stock grew 4.4% during the quarter to 8.16 quadrillion rials ($247.47 billion at market exchange rate of 33,000 rials per dollar).

The data disclosed in a press release this week shows a 22.7% year-on-year increase in broad liquidity in June 2015, showing it is expanding at a rapid rate despite central bank's attempts to rein in growth.

The central bank's efforts to sort out the country's financial system have cut money supply's rate of expansion. The speed of the increase in broad liquidity has dropped sharply from a staggering 40.7% for the 12 months ending June 21, 2014.

Analysts expect broad money to grow at a faster rate in the coming quarters, as the bank cut its cap on deposit rates by 200 basis points to 20% per annum. When asked if lowering the cap would stoke inflation, Farhad Nili, director of the bank's Monetary and Banking Research Institute, told Financial Tribune that "the worry is there, but we still have room for [our] inflation target, which target for this year is 14%."

Consumer prices rose about 15% year-on-year in June.

Data Off by 1350 bp

The rate of increase in total money supply for the year ending 21 June, 2014 has been revised higher significantly by the Central Bank of Iran.

The bank previously claimed money supply rose only 27.2% during the 12-month period, off by a long shot from the revised number of 40.7%.

The 1350 basis point revision is due to covering new data available from financial institutions the bank previously ignored or did not have access to.

What parts of money supply the central bank did cover before expanding its research coverage is anybody's guess. The 13.5 percentage points are not a normal data revision. Central bank data revisions, in developed countries, usually change data by a few basis points.  

Changing Makeup of Expansion

On the other hand, the central bank's efforts to contain Iran's galloping inflation have included changing the makeup of money supply's expansion.

The bank's monetary policy has been tightening the supply of cash—a dangerous fuel for inflation—while allowing for the expansion of lending and long-term investments—which have a lesser inflationary effect.

While broad liquidity grew 4.4% during the first quarter of the fiscal year, money base or hard cash in circulation, held with the central bank, only grew 0.4% during the same period. All the while, money multiplier rose 3.9% showing that most of the increase in money supply came from money created by commercial banks.

The continuation of money base's small share of money stock growth "shows the continuing improvement of the makeup of money supply growth," the bank wrote in its report.

Abundant Cash

Despite taking a lesser share of the growth in total money stock, money base still rose 13.6% in the 12 months to June 2015.

Mostly because of an increase in government borrowing from the central bank, which the bank claims will be repaid by the government before the end of the fiscal year in March 2016.

It is also worth mentioning that debt of commercial lenders to the central bank fell 5.2% to 44.4 trillion rials ($1.34 billion), having a contractionary effect on money base. The reduction in debt came from non-state banks.