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EghtesadOnline: With consumer price inflation galloping again in the last Iranian calendar month (Sept.22-Oct.21), the Central Bank of Iran in a report examined key factors pushing up prices and ways to control the trend.

CBI measures at damage control include a combination of monetary and forex policies designed to "manage inflation expectations" and pull the inflation rate closer to the target inflation announced by the regulator. 

As per the report on the CBI website, the plunge in government forex revenue and growing budget deficits were the main reasons behind the high and rising inflation.

The inflation rate has moved away from the target announced earlier by the bank, it said. Data released by the Statistical Center of Iran show that the average goods and services Consumer Price Index in the 12-month period ending Oct. 21 increased 27.2% compared to the corresponding period last year. 

On a monthly basis, the CPI rose 7% in the reviewed month, which was 3.4 percentage points higher than the month before. That was also the highest monthly inflation in the past two years. Save for a 7.1% monthly inflation growth in Sept.-Oct. 2018, the monthly inflation has never been higher since 2011. 

Last May the CBI set an inflation target of ±22% for the fiscal year that ends in March 2021. Observers say this is a tall order and the regulator will have a tough job reaching the target unless it is able to harness inflation expectations among the public. 

They assert that the government needs to finds ways to cope with the root causes of inflation, namely the historic rise in foreign exchange rates, ballooning money supply emanating from budget deficits and more.


Monetary Factors 

As for the role of monetary variables, the CBI said broad money supply had grown to 37.2% annually by Oct. 21, 1 percentage point higher than the figure for the previous month.  In the seven-month period from the beginning of the year (March 20), money supply posted 19.7% increase. 

Likewise, the monetary base was up 31.9% on an annualized basis and 10.1% since the beginning of the year. As part of measures to control the monetary base, the CBI has encouraged lenders to engage in open market operation implemented regularly by the bank. 

Using bonds as collateral to borrow from the CBI and regulating interbank interest rate are key elements of the bank’s OMO.    

The CBI said that interbank interest rates have increased steadily in recent months after dropping to 10% in June. 

"The average interbank rate reached a peak in the month to Oct. 21, registering an average of 20%", the CBI said, adding that the rate surpassed the upper bound of interest rate corridor (IRC) in the finals days of the month.  

As a component of the OMO, IRC is a mechanism under which the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup. 

Average interest rate in the interbank market reached 14.8% in the fifth month of the fiscal year (to August 21). It further increased 17.2% on average a month later (ending Sept. 21).

The CBI raised the lower bound of interest rate corridor (IRC) in the interbank market to 14% in August.  The upper bound now is 22%. 

"Increase in interbank lending rates is due to the fact that banks [in need of liquidity] did not have sufficient government bonds to borrow from the CBI," the bank said. 

It advised lenders to allocate a portion of their financial resources to buy government bonds. In times of liquidity distress, this will help them to put up bonds as collateral to be able to borrow from the CBI.  



The CBI also reported new measures to control variables affecting price inflation.  Holding regular bond auctions to raise funds for budgetary needs, supplying currency for imports, rewriting rules governing the legal reserve of banks and regular implementation of OMO are such measures. 

Despite the chronic shortage in forex, the CBI said $18.5 billion was secured for import purposes since the beginning of the year. 

Other plans to ease to pressure on prices arising from currency shortage include expanding "oil-for-good" barter deals and concerted efforts to unlock part of the CBI's assets blocked overseas.  

The government says barter will help promote Iran's foreign trade that has suffered due to the tough US sanctions and the coronavirus pandemic.    

As for measures to cope with chronic budget deficits, the CBI said bond sales via weekly auctions have so far contributed 716.3 trillion rials ($2.8 billion). 

Last month the CBI increased banks' reserve requirement ratio to 10-13%, after it was cut in March, to support businesses impacted by Covid-19.

The ratio was reduced after the deadly coronavirus spread earlier this year to help provide banks enough resources for supporting businesses in need. 



Iran CBI Inflation consumer price inflation