The Blessing of Maintaining Single-Digit Inflation

The government’s commitment to curb the inflation rate and maintain macroeconomic stability will redress one of the recurring behavioral patterns of domestic investors.

This was stated by an editorial by economist Hossein Bazmohammadi published in Financial Tribune’s sister publication Donya-e-Eqtesad economic daily under the title of “The Blessing of Maintaining Single-Digit Inflation”.

An indispensible requirement for growth, macroeconomic stability is achieved when the national economy minimizes its vulnerability to the impact of external shocks. Below is a free translation of the editorial:

Last [fiscal] year [ended March 20, 2017], Iran’s economy saw a single-digit inflation rate after 26 years, thanks to the perseverance and tenacity of administration officials and the central bank.

The inflation’s downtrend, which started in 2013-14, led to economic stability in other markets and macroeconomic stability in general over the past few years.

Short-term investment with an eye on profit-making is one of the realities of Iran’s economy. Long inflationary trends hitting the economy since the 1970s have played a significant role in forming this behavioral pattern. It has been etched on Iranian investors’ memory that the prices of their fixed assets (land, building and gold) will increase over time in a way that the real value of assets, or in other words their purchasing power, is preserved.

Any change in the mentality of Iranian investors, crucial in shaping their expectations about future prices, is impossible unless they are provided with experimental evidence.

There are close to 500,000 vacant homes in Tehran and 2.5 million across the country. Add to this the number of unsold commercial properties in big cities.

One main reason why owners of such properties have accepted the dormant nature of their investment, despite the expensive loans they have taken out from banks during the construction period, is that they have no confidence in the stability of prices.

They still anticipate a sharp rise in the value of real estate and this discourages them from selling their assets at reasonable prices to pay off the creditors, effectively worsening the recession.

The commitment of the present and future governments to curbing the inflation rate and achieving single-digit rates in the current year would have a significant effect on adjusting inflationary expectations of people and changing the behavioral pattern of Iranian depositors and investors. It will also elevate the credibility of policymaking.

The creation and maintenance of price stability would bring about macroeconomic stability, gradually correct the mentality of domestic investors and clear one of the main hurdles to attracting more foreign investments. This will, in turn, pave the way for fostering production and job creation.