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EghtesadOnline: Growth in key monetary variables, including money supply and the monetary base, lost momentum in the calendar month to Dec. 20, the Central Bank of Iran said.

Outlining trends in major macroeconomic variables and measures to control inflation, it reported significant changes in the composition of money supply. 

Without providing figures the CBI website said growth in the share of money (M1) in money supply has dropped to zero, "which indicates that liquidity of bank deposits declined." 

M1 growth was zero in the month to Dec.20 compared to the previous month. It posted 69.7% growth in the twelve months ending on Dec. 20, down 10.3% compared to the 80% annualized growth a month before. 

"This shows that deposits stay longer in banks and signifies decline in inflation expectations," the CBI report said.

M1 refers to highly liquid assets, including physical currency and coins, demand deposits, traveler checks, other checkable deposits and negotiable order of withdrawal (NOW) accounts.

Likewise, broad money supply and the monetary base increased by 26.6% and 15.5% on Dec.20 during the course of nine months since the beginning of current fiscal year last March. 

Compared to the same period last year, money supply grew 6.4 percentage points but the monetary base declined 2.8 percentage points.  On an annualized basis, however, both variables rose with money supply and monetary base respectively increasing 38.3% and 29.7%. 

The CBI said its effort in controlling key monetary variables had helped maintain some stability in the financial markets. The impact of reduced growth in monetary indicators is evident in forex rates, declining pattern in the auto and housing market, and generally on inflation expectations. 

"If this trend continues in the coming months, there would be more hope for realizing the inflation target of 22%," the CBI said. The regulator in May announced an inflation target for the first time based on which overall inflation in the twelve months ending May 2021 is set at ± 22. 


Monetary Policy Helps 

Open market operation monetary policy has delivered by curbing banks’ contribution to expansion of monetary base and helped in reducing interest rates in the interbank market. 

"Controlling money supply in the interbank market through OMO and banks' using regulated borrowing has caused interest rates to move within the policy interest rate corridor".

While the monetary policymaker has set the upper bound of interest rate corridor (IRC) at 22%, the interbank rate reached as high 23.2% on Oct. 29. The rate was steady at or around 20% in the month to Dec. 20. 

IRC is a system guiding short-term market interest rates towards the central bank’s target/policy rate. It is a rate at which central banks lend to banks (typically an overnight lending rate) and a rate at which it takes deposits from them (deposit rate). 

Under the IRC structure, the CBI sets the floor and ceiling of policy rates and lets other money market rates, such as interbank rate, move within this setup.

The regulator said it managed to control rates by weekly implementation of OMO last month. It paid 162.8 trillion rials ($650 million) to banks under repurchase agreements. 

As a component of open market operation, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys it back on the maturity date at a slightly higher price. Repos are typically used to raise short-term capital.

 In addition, the CBI lent 13.8 trillion rials ($55.2m) under the OMO mechanism through which banks are obliged to put up bonds as collateral with the CBI to borrow. 

Nonmonetary Measures 

As for nonmonetary measures to curb inflation, the CBI referred to efforts to make enough foreign currency available for importing goods and prevent a supply crunch in the chaotic forex market. 

It said $25.1b was given for imports in the first nine months of present fiscal year (ending Dec. 20), of which $7.4 billion went only for essential goods. 

The regulator has increased supervision on the balance sheets of banks and credit institutions to prevent unbridled growth in the monetary base. 

On behalf of the government the central bank sold 124.1 trillion rials ($500m) in bonds in the reviewed month to reduce the government’s overreliance on the CBI for funds to cover budget deficits. 


Iran CB monetary variables