In an Instagram post on Sunday the CBI boss Abodlnasser Hemmati said the regulator is working on solutions to control volatilities in macroeconomic variables. In particular he referred to the high and rising inflation rate.
“In the present economic conditions it should be noted that aggregate demand is not rising,” he wrote.
In economic parlance, aggregate demand refers to total demand for final goods and services in the economy which if raised leads to demand-pull inflation, according to Financial Tribune.
Hemmati acknowledged the inefficiency of past monetary policies and stressed the need for reforming and modernizing monetary policies.
“In the past monetary policies have been rewritten to help control liquidity.”
In his earlier statements, Hemmati had said the CBI would not change interest rates and was looking to change the liquidity structure, arguing that one of the main reasons for the rise in money supply was (high) interest rates.
The CBI chief wrote thanks to CBI measures, the pace of liquidity growth is decelerating despite volatilities in major economic variables in the last fiscal that ended in March.
According to Hemmati, liquidity grew 23% last year compared to a year before, which was 4% lower than the liquidity figures for fiscal 2014-15.
As per the latest monthly CBI report, liquidity reached 17,645 trillion rials ($150.8 billion) in the fiscal month to December 21, up 22.1% compared to the same period last year.
According to the Statistical Center of Iran, overall consumer inflation registered a year-on-year increase of 51.4% in the month to April 21 compared to the similar month a year ago.
OMO Role
In its more recent move to help alleviate economic and currency problems, the CBI embarked on regulating the interbank market by launching the Open Market Operation.
“Within the new monetary policies and using OMO, the CBI seeks to draw on short-term interest rates to check inflation in a persistent and sustainable manner”, he added.
OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce the supply of money. Within OMO, the CBI buys government bonds to increase the money base (cash reserves), thereby reducing inter-banking lending rates.
On the other hand, selling government bonds decreases the base money and raises interbank rates.
The policy was approved earlier in the month by Money and Credit Council- a major monetary decision-making body as part of the CBI plan to implement new instruments in its monetary policy, regulate interest rates, curb inflation, and develop a regulated framework for controlling banks’ borrowings from the CBI.
Hemmati has often said that monetary discipline of the government and correcting the balance sheets of banks are crucial for the success of the CBI’s new monetary policies.
By monetary discipline, the governor refers to the colossal borrowing by the government and banks from the CBI, an issue which also has become a major cause of concern for the Majlis Research Center.
Within current procedures, lenders in need of liquidity are not obliged to keep collateral with the CBI for their inter-bank debt settlements.
According to the MRC, this is “a “wrong practice” which must end as many countries oblige banks to keep collateral for borrowing from central banks.
Hemmati is of the opinion that the regulator oversee the troubled balance sheets of banks via instruments like the capital adequacy ratio and implement its instructive policies with a close eye on lenders.