Monetary Base Expands 42%

The monetary base grew 42.1% or 1,530 trillion rials ($5.6 billion) in 12 months to August 22, reaching 5,160 trillion rials ($19b). It was also up 12.4% or 570 trillion rials ($2b) in the five months since the beginning of the current fiscal year in March.  

Broad money supply grew 12.8% in five months and climbed  39.1% in 12 months reaching 39,220 trillion rials ($145b).

On a monthly basis, money supply grew 2.7% or 1,020 trillion rials ($3.7b), which means that in the preceding calendar month, 34 trillion rials was added to the financial cycle every day.

Money multiplier stood at 7.601, the highest in the past seven months, up 0.3% in five months but 10.5 percentage points lower compared to the first five months of the previous fiscal year. The figure indicates that with each rial created by the CBI money supply increased by 7.6 rials.    

 Money multiplier measures the maximum amount of commercial bank money that can be created by a given unit of central bank money.

The CBI linked increase in money multiplier to decline in the percentage of banknotes and coins in circulation to bank deposits. It also was due to decline in the ratio of lenders’ legal reserve to deposits.

Lenders legal reserves fell from 304.1 trillion rials ($1.12b) in mid-March to 277.5 trillion rials ($1b) in mid-August. Observers say this helped in increasing banks’ lending capacity.

When increase in money supply is caused by money multiplier numbers, it indicates banks are doing well in attracting deposits and giving loans. However, when increase in “unbridled money supply” stems from the monetary base, it is a sign that the government is too inclined on central bank funding.

CBI lending to the government in the form of discretionary spending is said to be the main contributor to the rising monetary base. Data suggest that the former government borrowed 555.3 trillion rials ($2b) from the CBI fore deficit spending.

Discretionary spending has increased compared to the last  fiscal year. As per a Cabinet decision in June, the government was allowed to borrow 4% of the fiscal budget spending from the CBI, up from the initially mandated 3%.

Need for increased discretionary spending rose after the government failed to realize rather ambitious revenues seen in the budget.

 Inflation Expectations Subdued  

Examining the components of money supply, the CBI said the share of money (M1) declined from 61.7% on March 21 to 36.4% on August 22 -- usually seen as a sign of decline in inflation expectations.

M1 is composed of physical currency and coins, demand deposits, travelers' checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts.

The Statistical Center of Iran said the average goods and services Consumer Price Index in the 12-month period ending Aug. 22 increased by 45.2%.

Overall CPI was 3.2% higher in the month compared to the previous month, down 0.3 percentage points compared with the reported monthly growth in the preceding month.

Most markets were volatile last month. One square meter of a housing unit, for example, was up 3.1% compared to the month before. Likewise the benchmark of Tehran Stock Exchange, TEDPIX, gained 15.6% and the dollar on average was worth 255,000 rials, which was higher than the previous month average.    

Despite the rise in major asset markets, the CBI said it has no intention to take any monetary measures to control inflation expectations for now.  

The regulator, however, noted that “if change in asset prices is indicative of rise in inflation expectations and interbank interest rates continue to decline it may change the policy interest rate in the interbank market. However, at present the CBI doesn’t see the need to rethink policy interest rates.”

The policy interest rate is a rate set by the CBI to influence the evolution of the main monetary variables in the economy (consumer prices, exchange rate or credit expansion, among others).