Economy, Business And Markets

Monetary Base Expansion Behind Liquidity Hike

Monetary Base Expansion Behind Liquidity Hike Monetary Base Expansion Behind Liquidity Hike

A report published by the Parliament Research Center has attributed the hike in liquidity in the first quarter (spring) of this year to an increase in both the monetary base and foreign assets of the Central Bank of Iran.

Monetary base is the total amount of a currency either circulated in the hands of the public or in the commercial bank deposits held in the central bank’s reserves.

According to the report, the increase in liquidity also to some extent results from a 6 percent increase in the money multiplier, which is one of the various closely related ratios of commercial bank money to central bank money that measures the maximum amount of the commercial bank money that can be created by a given unit of the central bank money.

The report also examines the monetary variables of the past two Iranian years (March 21, 2012-March 20, 2014), while also assessing the data for this year’s first quarter (March 20-June 21).

Liquidity grew 30.7 percent in the spring, according to the report, showing a 5.2 percent increase compared to the same period last year.  The monetary base decreased 2 percent in the period.

Also, in the twelve months ending in spring 2014, the monetary base increased 22.3 percent, indicating 8 percent decrease.

Money supply decreased to 1,143,740 billion rials ($42.78 trillion based on official foreign exchange rate) in the spring from 1,192,330.7 billion rials ($44.60 trillion) in the same season last year, showing a 4 percent decrease.  

In the meantime, money multiplier has increased by 6.3 percent compared to the end of the previous year (March 20, 2014) and has reached 5.5 at the end of the first quarter of the current year.

The report anticipates that the recent announcement of the central bank, which requires banks to reduce the proportion of their reserve requirements as an expansionary policy, may result in a rise in inflation.