“We [central bank] are steadfast in implementing measures aimed at controlling inflation and boosting the economy,” Hemmati wrote in an Instagram post Saturday.
Highlighting plans enshrined in draft of budget bill for next fiscal year (March 2020-21), he specifically pointed to the anti-inflationary policies that could be realized by regulating trade in the bond market.
In particular, he underlined the role of open market operations in regulating interest rates in the interbank market and prohibitive measures that the regulator plans to set on lenders’ borrowing from the CBI, according to Financial Tribune.
“Lenders have to adapt themselves to new monetary policies,” he said, advising them to adjust their balance sheets based on new frameworks.
One can infer from Hemmati’s reference to OMO, and its function in curbing inflation, that he backs the government plan to issue bonds in huge volumes in the upcoming fiscal year, a policy that has received a fair share of criticism due to its negative effects on the bond market.
As per the draft budget, the government expects to make 1,090 trillion rials ($8.3 billion) by selling securities. This figure is up 70% compared to the 640 trillion rials envisaged in the budget for the current fiscal year.
Referring to permits given to the government as per the proposed budget, Hemmati said the CBI will employ OMO in order to manage interest rates in the interbank market in a way that it would eventually lead to decline in the galloping inflation.
Concered Efforts
As a key step toward regulating the interbank market and reducing lenders’ dependence on the CBI, the regulator has made concerted efforts to start the OMO over the past year.
OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply.
In 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.
Within the OMO banks can hold bonds as collateral to borrow from the CBI. In short, governments issue bonds to be later used by banks as collateral to borrow from the CBI.
In Note 5 of budget bill, the government has envisioned the launch of OMO in the next fiscal year for “implementing monetary policy, managing interest rate and controlling inflation”.
Accordingly, the CBI is allowed to collateralize banks’ debts over a gradual process in a way that at least 50% of banks and credit institutions’ debts to the CBI are collateralized by debt bonds issued by the treasury.