Inflation Expected to Rise Above 10% Next Year

EghtesadOnline: Donya-e-Eqtesad Media Group held the Fifth Iranian Economy Overview Conference on Tuesday.

News ID: ۷۸۱۹۷۰

03 March 2018

The event was attended by a host of economists and market analysts whose aim was to forecast the Iranian economy’s performance in the next fiscal year (March 2018-19) and in the long run.

The analysts unanimously believed that the inflation rate is likely to rise above 10% in the next fiscal.

They contend that the government's drive to push down the inflation rates came at the expense of subdued demand in the economy, while high interest rates locked away growing liquidity, according to Financial Tribune.

The average goods and services Consumer Price Index for urban areas in the 12 months ending Feb. 19, which marks the end of the Iranian month of Bahman, increased by 9.9% compared with last year’s corresponding period, the latest report released by the Central Bank of Iran announced.

CBI had put the inflation rate for the preceding month (Dey), which ended on Jan. 20, at 10%. The overall CPI (using the Iranian year to March 2017 as the base year) stood at 113.4 in Bahman, indicating a 0.9% increase compared with the previous month.

The index registered a year-on-year increase of 9.4% compared with the similar month of last year. The CBI report came after the Statistical Centre of Iran put Bahman inflation at 8.3%.

In a recent analysis, Donya-e-Eqtesad experts said they expected the inflation to remain below 10% by the end of the current fiscal year (March 20).

Inflation in Iran reduced to a single digit for the first time after about a quarter century in June 2016.

But how exactly did the government of President Hassan Rouhani manage to pull down the inflation below 10%?

According to a presentation by Mehdi Barakchian, a professor of economics at Sharif University of Technology, at the conference, inflation has been kept down since Rouhani took office in August 2013 using a chain reaction of artificial factors while money supply increased.

"Historical inflationary trends in Iran show that monthly inflation rate from the fiscal 1989-90 to 2013-14 averaged at 1.5% and stood at 0.9% from 2013-14 to 2017-18 while liquidity growth averaged at 25%," he said.

He said high deposit interest rates both led to first, a tendency to inject money into banks’ coffers for higher returns, and second, a sprinting growth in long-term deposits and a subsequent increase in the money multiplier.

On the one hand, increased saving caused a drop in demand in retail, housing and other markets (which was partly augmented by lower oil prices and reduced public spending). On the other, growing government budget deficit and rising debt to the Central Bank of Iran started to boost liquidity. Both factors helped dampen inflation.

Other factors affecting inflation were depressed global prices for the period, a relatively fixed rial value, surging output gap and unused capacities.

Barakchian noted that the widening gap between liquidity growth and inflation, coupled with the reversal of most anti-inflationary factors (such as the recovery in global markets, negative output gap and rial’s recent value fluctuation) points to the looming return of high interest rates.

Nevertheless, Iranian policymakers sound unsure of the path they want to take in the year to come: fixating or floating the rial’s value against the dollar, cutting or boosting interest rates and maintaining or reducing energy carrier subsidies.

Reducing deposit interest rate will cause the release of inflationary effects of pooled up liquidity. At the same time, the rise in interest rates will help keep inflation low for the time, but accentuates its eventual release and further weakens the banks in the process.

Barakchian believes that inflation will average at 23.5% during 2018-21, with the prerequisites being an average 10% annual increase in investment, 3.2% economic growth and an average liquidity growth of 27.2%.