CBI Says: OMO Timely and Apt

EghtesadOnline: The new monetary policy of the Central Bank of Iran was timely and appropriate during the difficult economic conditions, head of the CBI's department for open market operation said.

News ID: ۷۸۶۲۸۱

16 March 2021

Reza Boustani said open market operations have been innovative and to a degree helped overcome tough economic times like the pandemic plague and the US economic blockade.

"Overcoming these tough times demanded innovation foresight. The central bank was long mindful about the need to reform monetary policy instruments," he was quoted as saying by the CBI website.

CBI launched the OMO in January 2020 to curb inflation, control interest rates in the interbank market and improve liquidity management.

OMO is employed by monetary authorities to regulate the cost and availability of credit in the banking system. It enables central banks to buy and sell securities to expand or reduce money supply.

The mechanism allows central banks to buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  Selling government bonds reduces the base money and raises interbank rates.

It has also restored discipline to the practice of borrowing from the central bank obliging borrowers to put up sufficient collateral with the regulator.

Recalling the array of economic troubles afflicting the country in recent year, the banking official, however, concurred that OMO is no panacea.

"The open market operation is an instrument at the disposal of central banks to ease monetary policy. Of course, it cannot be a panacea” for all the economic damages that have piled up over the years, he said.

Iran's economy is struggling with unprecedented budgetary problems due to the sharp decline in crude oil revenue. Oil exports were cut off after the expiration of US waivers temporarily granted to major Iranian oil importers and further tightening of banking restrictions plus new sanctions imposed on its petrochemicals, metals, mining, shipping and insurance sectors.

Despite unprecedented growth in money supply and monetary base, the CBI says its monetary policy has gone a long way in preventing further growth of major monetary variables.

As per CBI data, the monetary base rose 23.6% by end of the month to Feb. 18 in the course of eleven months since the beginning of fiscal year that ends on March 20.

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.

OMO has apparently enabled the CBI to navigate interbank interest rates through set targets. As a component of OMO, the regulator has set up an interest rate corridor (IRC) to control rates. Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets interbank rates move within this setup.

Using OMO, the CBI says, curbed interbank rate growth in recent months, pulling it down from a high of 23.2% in October.  Earlier in the month, the CBI Governor Abdolnasser Hemmati said the interbank rate had declined to 19.7%.