CBI: Inflation Expectations Declining

EghtesadOnline: The Central Bank of Iran says inflation expectations continued to decline in the previous fiscal month ending Jan. 19, as indicated by stability in various financial markets.

News ID: ۷۸۵۹۷۱

13 February 2021

In a performance report published on its website, CBI enumerated various anti-inflationary measures in the month under review.

Taking stock of the slowing pace of inflation in the month in light of declining trends at various markets, CBI said "if the current trend were to continue, the monthly inflation will decline further in the coming months, which by extension, has a deferred impact on average annual inflation".

This can help realize the inflation target of ±22% set by CBI for the first quarter of the next fiscal year (March 20-June 21, 2021).

The overall Consumer Price Index rose 1.8% last month, down 0.2 percentage points compared with the month before, according to data released by the Statistical Center of Iran.

The annual inflation, however, is far from the target set by the regulator. The average CPI in the 12-month period ending Jan. 19, which marks the end of the 10th Iranian month, increased by 32.2% compared with the corresponding period of last year.

As per the report, yield on treasury bills swung slightly in the month, rising 0.47% to 19.14% for treasury bills that mature in one year. Yield on two-year maturity bills declined from 20.36% to 20.21% in the month.

"Slight fluctuations in midterm yields indicate a decline in inflation expectation," CBI said.

Without mentioning figures, the report put growth in money supply and monetary base respectively at 30.1% and 18.8% in the first 10 months of the current fiscal year.

On an annualized basis, the money supply remained unchanged but the money supply posted growth due to "special conditions arising from the Covid-19 outbreak and the need to support economic activity".

Analyzing the components of money supply, the CBI report indicates a decline in the share of money (M1) as the most important inflation-generating factor.

Accordingly, M1's contribution to money supply declined from 20.8% in the month to Oct. 21 to 19.5% on Jan. 19, "which means money stays longer in banks, indicating depositors' inclination toward long-term deposits and a confirmation of the decline in inflation expectation".

M1 refers to highly liquid assets, including physical currency and coins, demand deposits, traveler checks, other checkable deposits and negotiable order of withdrawal accounts.

Anti-Inflationary Measures

As for measures to control variables affecting price inflation, CBI pointed to the regular implementation of open market operation (OMO), holding weekly bond auctions to raise funds for budgetary needs, supplying currency for imports and rewriting rules governing the legal reserve of banks.

CBI highlighted its performance in controlling money supply in interbank market via implementing open market operation on weekly basis.

To control interbank interest rates, CBI injected 177.4 trillion rials ($700 million) in interbank market under the repurchase agreement (repo) in the month under review.

As a component of 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.

Banks also borrowed credit worth 176 trillion rials via "structured borrowing", which refers to the initiative through which banks place bonds as collateral with CBI to borrow within the OMO framework.

Despite the chronic shortage of forex, CBI said $28.4 billion were secured for import purposes since the beginning of the year.

Following a decision earlier in the month by Iran’s Money and Credit Council, CBI said it is exercising a “cautionary” policy to control the balance sheets of banks with poor financial performance.

MCC asked CBI to take different approaches toward the expansion of balance sheets of banks, subject to their mission and financial status. Accordingly, the Central Bank of Iran, among other things, will impose new restrictions on the balance sheets of dysfunctional lenders with poor performance.