Ray of Hope for Business Climate

In a note posted on his social media account on Sunday, Abdolnasser Hemmati pointed to the relative calm in the forex and gold markets as a signal that the worst inflation fears may be over. 

He said the new development is the outcome of a package of measures taken by the government and the central bank to control galloping inflation, expressing the hope that the trend would continue. 

"Given the visible change in inflation expectation in recent weeks, it can be hoped that these measures will reduce the turbulence and uncertainty and help pave the way for [improving] the business climate and manufactures," he wrote.  

Hemmati said the CBI will strive to maintain stability in the currency market and employ monetary instruments to reach to the lower inflation target announced earlier.

Earlier this year, the CBI said it was setting the inflation target at ± 22% for one year ending next May. However, there were and are valid arguments that this is a tall order, more so because of the speed at which consumer prices have been rising in recent months and the decline in purchasing power breaks records.  

Financial Markets Tumble

Decline in inflation expectations could be perceived in light of weak sentiment in Tehran's currency and gold market over the past three weeks.

Forex rates skyrocketed since May spurred by shortages arising from decline in foreign trade due to the Covid-19 plague and the US economic siege announced by the acrimonious Donald  Trump, the outgoing US president aka as the ‘great destroyer’ to global public opinion. 

The currency crunch was accompanied by expectation of higher inflation among the public, pushing them to invest their devalued rials in stocks, currency and gold over fears of further deprecation of the national currency. 

Price of the dollar almost doubled in less than six months from May to mid-October reaching the all-time high of 323,000 rials. Likewise, the popular gold coin haven rose from 73 million rials to 163 million rials and about three months. 

However, both markets have been sluggish in the past three weeks. The dollar has declined more than 23% from the record high and was traded below 250,000 rials in Tehran on Sunday. 

Taming Inflation 

As for measures taken to curb inflation and calm markets, Hemmati pointed to the government initiative to "fund budget deficits by issuing bonds and selling shares", instead of borrowing from the CBI. 

The Rouhani administration has generated 780 trillion rials ($3 billion) from bonds in regular auctions held by the CBI.  It has also earned 320 trillion rials (1.3b) via selling assets in the first six months of the fiscal year. This is comparably higher than the whole of last fiscal year when the government had made 60 trillion rials from privatization. 

Hemmati referred to ongoing measures to correct the balance sheets of banks to prevent their impact on monetary variables and inflation. 

Following a decision earlier in the month by Iran’s Money and Credit Council, the CBI says it is exercising a “cautionary” policy to control the balance sheets of banks whose performance has long been under a question mark. 

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