The Central Bank of Iran in a report assessed the role of open market operations in monetary policy and "modifying interest rates" and "controlling money supply" in the last calendar month ending Feb.18.
The CBI said it regularly implemented the OMO in the period through which more than 600 trillion rials ($2.4 billion) was injected into the interbank market to meet lenders' "emergency needs" for liquidity.
As part of measures to control the monetary base, the regulator encouraged lenders to engage in OMO. Using bonds as collateral to borrow from the CBI and regulating interbank interest rate are key elements of the OMO.
As per the report seen on the CBI website, banks borrowed 350.7 trillion rials ($1.4b) in the form of "structured lending" in which lenders put up bonds as collateral to borrow.
Structured borrowing increased 190% in the month compared to the 119.5 trillion rials a month before, indicating that using bonds to borrow was gradually becoming a norm in the Iranian banking industry.
In addition, banks in need of liquidity secured credit worth 252.8 trillion rials via repurchase agreements (repo) with maturities of 12, 14 and 16 days.
As a component of the OMO, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to investors and buys it back later at a slightly higher price. Repos are typically used to raise short-term capital.
To reduce government dependence on the central bank to cover budget deficits, the CBI sold bonds worth 104.2 trillion rials ($416 million) in the previous calendar month.
CBI says its monetary policy has gone a long way in preventing further growth of major monetary variables, namely money supply and monetary base.
Money supply and monetary base rose 23.6% and 33.8% by end of the month to Feb. 18 in the course of eleven months since the beginning of fiscal year in March 20, 2020.
By "curbing over-borrowing and selling bonds" the CBI says it managed to keep the monetary base in check last month as its growth rate was unchanged compared to the same month last year.
"However, special conditions arising from pandemic and the need to support economic activity caused the money supply to grow higher than last year."
Banks have often been blamed for overexpansion of money supply and the regulator has tightened oversight of their balance sheets.
Inflation Expectation Declining
The CBI referred to the decline in the share of money (M1) in the composition of money supply as a sign of "decline in inflation expectations" and "indicative of the fact that money stays longer in banks.”
Accordingly, annualized M1 growth stood at 56.9% and M2 increased 35.3% in the mentioned period. In the month to October 21, M1 growth in the course of twelve months was 88.6%. M2 grew 28.1% in the year ending Oct. 21.
M1 is composed of physical currency and coins, demand deposits, travelers' checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts. M2, also called near-money, refers to less liquid assets that can be quickly exchanged for cash. Examples are bank certificates of deposit and treasury bills.
Given the noticeable decline in inflation expectations, as also seen in the relative stability in financial markets, the central bank says it would not consider raising interest rates to control inflation.
Earlier in the week, the CBI governor Abdolnasser Hemmati said the regulator is trying to steer the interbank rate to the middle of the interest rate corridor (IRC).
Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.
On a staged basis, the lower bound of IRC rose from 10% in May 2020 to 14% at present. The upper bound was set at 22% but it went up as high as 23.2% in October. It declined to 20.7% in late November. Hemmati said the interbank rate declined further to 19.7% last week.
