Raisi Says CBI Should Control Inflation

EghtesadOnline: President Ebrahim Raisi said controlling inflation is a high-priority of his government issue and asked Central Bank of Iran to adopt appropriate monetary policy in this regard.

News ID: ۷۸۷۰۷۶

29 September 2021

“The CBI should espouse monetary policies to better manage money supply and tame inflation,” Raisi said in a meeting with members of his government’s Economic Coordination Headquarters, IRNA reported.

His government, like former administrations, is grappling with runaway inflation emanating mainly from the mounting budget deficit. Inflation is officially in the region of 50% and consumer prices continue to rise at speeds unseen in recent memory.

The Statistical Center of Iran said last week the average goods and services Consumer Price Index in the 12-month period ending Sept. 22, hit a new high of 45.8% compared to the corresponding period the year before.

Apart from CBI monetary policies, the government is trying to reduce the budget deficit by cutting operational expenses.

Raisi reiterated that high inflation is an inviolable red line for the government and called on administrative bodies to cut costs.

The Plan and Budget Organization was mandated with rewriting the budget, determining priorities and “cutting unnecessary expenses”.

In the past two years the CBI has struggled to control money supply through open market operations as a tried and tested  monetary policy around the world. The bank says the policy has delivered to some extent but must be combined with other measures to curb inflation that has made life miserable for fixed-wage earners.

OMO was launched in January 2020 in line with the regulator’s efforts to restrain banks’ dependence on the CBI, curb inflation and control interest rates in the interbank market. It is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.

Within this framework, central banks can buy government bonds to increase the money base (cash reserves) and by extension curb inter-banking lending rates.  By the same token, selling government bonds reduces the base money and raises interbank rates.  In addition, within the framework, banks can hold bonds as collateral to borrow from the CBI.

Data released by the CBI indicate that broad money supply grew 12.8% in five months and climbed 39.1% in 12 months reaching 39,220 trillion rials ($145 billion).

The staggering growth is said to be due to the CBI lending to the government in the form of discretionary spending. The CBI says its monetary policy has gone a long way in controlling the money supply and monetary base.