Economy, Business And Markets

Pros and Cons of QE Policy

Pros and Cons of QE Policy Pros and Cons of QE Policy

A report said the Central Bank of Iran plans to adopt a quantitative easing policy to get banks on track, but the bank itself has not yet released any details on the mechanism it may apply to inject money into the banking system. As authorities are weighing how to implement the plan, some experts have grabbed the opportunity to examine the efficiency of the method and its requirements.    

Bahaoddin Hosseini Hashemi, former CEO of Bank Saderat and Tat Bank, said the implementation of QE policy can help boost banks’ lending power and supply of goods and services in consequence, which would neutralize the impact of monetary base increase on inflation.

He said QE is a type of monetary policy used by central banks at the time of downturn to stimulate the economy when the standard monetary policy becomes ineffective. “During recessions, banks would face a large amount of non-performing loans, which would lead to liquidity problem and bankruptcy,” Banker news website quoted him as saying on Saturday.

“Given the situation, central banks have two options to help tackle the problem.They can either buy securities owned by banks and individuals to increase liquidity, or rediscount banks’ financial assets that have maturity dates of less than a year, regarded as QE policy.”

Hashemi said central banks carry out QE by buying specified amounts of financial assets from commercial banks and other financial institutions, thus raising the prices of financial assets and lowering their yield, while simultaneously increasing the money supply.

“However, the central bank should avoid buying future financial assets that are at a high risk of loss,” he underlined.

The policy would also decrease banks’ willingness to violate limits set by the regulator in terms of offering high deposit rates to absorb more capital, he added.

Currently, only 30% of nominal capacity of production are utilized, he said, noting that following QE policy implementation, the manufacturing sector can receive an impetus if banks lend out additional reserves to this sector.

Therefore, he said, production will improve, making the supply increase in line with the growing demand for goods, which will prevent inflation from increasing.

“However, as soon as the capacity of production is totally utilized, money supply will not lead to production increase anymore,” he warned, noting that at this point, only new investments would trigger production.

For the success of monetary easing, the country’s trade policy needs to curb imports and prevent inflow of contraband into domestic market, he said.

“In addition, there should be tight supervision over banks to make them allocate funds purposefully to production instead of pursuing speculative activities.”

“As there are still lots of empty capacities in Iran’s manufacturing sector, CBI needs to put supply of working capital on top of its agenda,” he stressed.

However, some officials believe that it is not an appropriate time for carrying out QE due to banks’ structural problems that need to be tackled first.

Heydar Mostakhdemin Hosseini, former deputy for legal affairs at CBI, said as banks allocate 70% of their total resources to the service and trade sectors, additional funds would mostly benefit these sectors rather than manufacturing.

He said banks’ engagement in speculative activities would harm the central bank’s policy of boosting production.

“As long as the banking system’s structure is not reformed, any policy to raise banks’ financial resources would only benefit a particular group of borrowers who have influential connections,” Fars News Agency quoted Hosseini as saying.

Mohammad Jahromi, a member of Money and Credit Council, also believes that if QE policy increases banks’ debt to the CBI, its disadvantages would overweigh its benefits due to the likely increase in monetary base and inflation.

“But, if the funds are provided through CBI’s deposits, state budget or National Development Fund, it would help specialized banks like Bank Keshavarzi and Bank of Industry and Mine to better finance manufacturing sector,” he told the agency, calling on CBI officials to clarify how they are seeking to provide resources.