Economists of all stripes have voiced strong reservations about central bank’s bold decision to set an inflation target of 22%. This, they say, is subject to conditions which if not realized would undermine public trust in the top regulator.
In a statement on Tuesday, the CBI set the inflation target at 22% during the current fiscal year that ends in March 2021.
Kamran Nadri said targeting inflation could be an effective instrument per se if the Central Bank of Iran “takes informed steps toward the target in tandem with all the effective variables”.
Failing to do so would “Undermine public trust in the monetary policymaker,” he was quoted as saying by the Persian-language economic weekly Tejarat Farda, a sister publication of the Financial Tribune.
Nadri says it would be unreasonable to set a fixed inflation rate in an economy where financial market indicators fluctuate at a fast pace.
In his view, there should be an adequate compatibility between inflationary expectations and the inflation target set by the regulator.
In a nutshell “one cannot set the inflation target at 22% while returns in the stock market are 100% in a month, or gold and forex trade post threefold growth in a short span.”
Nadri sees the sharp growth in financial markets as a signal of high inflationary expectations, underscoring the need and urgency to first “anchor inflation expectation”.
A review of data from financial markets reveals high inflation expectation among the general public, showing that they are rushing toward gold, forex and stock markets as safe havens to protect the sinking value of their hard-earned life savings.
Market data show that investment in the bourse brought big fat profits of 43% and above in one month ending May 20.
Returns on investment in the bullion market were around 20% as seen in 19.7% growth in gold coin prices and a 20.6% hike in one gram of 18-karat gold compared to a month earlier. Major currencies also jumped against the rial with the dollar up 14.4% in one month.
Like most economic experts Nadari expressed regret that there has long been a lack of will among policymakers to harness inflationary expectations.
“There is no vision at the policymaking level that can and should ensure proper management of inflationary expectations,” he rued.
Impact of Interest Rate
He pointed to the decision to keep interest rates on long-term deposits as “one of CBI’s mistakes,” saying that it will give rise to sight deposits which in turn would push up the runaway inflation.
In April the CEOs of banks decided to set a 15% cap on long-term deposits down from the previous 18%. They also agreed to cut interest rates for short-term deposits by 2%.
The pattern of cutting interest rates over the years undermines the shrinking enthusiasm of the people to keep their money in banks as the national currency tanks and galloping inflation eats away at their rainy-day savings.
Lower rates also mean that the people will take their savings to other markets such as gold and foreign currency, hitting financial markets with new price shocks.
Farshad Mo’meni, a faculty member of the Economics Department of the prestigious Allameh Tabatabai University, cast doubt on the decision to set inflation targets. “This cannot deliver if the central bank sticks to its wrong policies”.
In a talk with IBEN, he blamed the CBI for its inability or unwillingness to control what he describes as the “avariciousness of private banks.” Private lenders must be held accountable for the rampant liquidity, which is the main factor driving inflation through the roof, he said.
Mo’meni castigated the CBI for failing to exercise robust supervision over private banks, accusing the lenders of using their financial clout to pour money “in speculative markets instead of manufactures.”
Vahid Shaqaqi, a university instructor, criticized the CBI policy arguing that the regulator should first identify and stabilize key variables affecting inflation before venturing into setting inflation targets.
“Volatility in the currency market, stability in the capital market, improving non-oil trade balance, managing budget deficits and controlling the monetary base are among such variables,” he was quoted as saying by ILNA.
Shaqaqi said none of the above variables are in a stable condition, which makes targeting inflation more, not less, difficult.
The CBI’s Stance
The CBI insists it has adequate monetary policy and has set the inflation target based on “realistic assumptions and scenarios”.
The regulator says its leverage to control inflation was limited in the past half century due largely to inadequate and advanced monetary policy instruments.
It hold the opinion that ow is the opportune time for a change of attitude toward managing inflation given the expansion of instruments for managing the money market, a bigger voice and space for private enterprise and change in approach to plugging budget deficits.
CBI Governor Abdolnasser Hemmati on Friday rejected criticism that the bank wants to set arbitrary and prescriptive inflation targets.
“The CBI’s forecast of inflation is based on the assumption that factors influencing inflation are stable”.
CBI data show that inflation was 41.2% in the last fiscal year (March 2019-20). The figure is expected to drop this year, the International Monetary Fund has reported.
The global lender has forecast slight improvement in Iran’s economic indicators in 2020, saying that consumer prices would drop to 34.2% in 2020 and 33.5% in 2021.
