News ID: 112378
Published: 0737 GMT February 23, 2015

Monetary policy scenarios debatable

Monetary policy scenarios debatable

By Hamid Zamanzadeh

In line with the government's fiscal policies, the Central Bank of Iran (CBI) managed to control the liquidity growth rate and maintain it between 23 percent and 25 percent in the quarter ending December 21, 2014.

The upbeat outlook indicates that CBI will be able to uphold its tight grip on liquidity growth rate in the fourth quarter to March 21, 2015.

Undoubtedly, CBI's approaches to regulate monetary policies have contributed to making the national economy stable and arresting inflation.

Henceforth, CBI monetary and fiscal policies for the next fiscal year (to start March 21) will steal the limelight. The central bank should devise monetary approaches that can match economic conditions.

Plans that do not take economic realities into account will spell disaster for the national economy. Despite the continuance of tough economic sanctions, the government has managed to overcome recession.

Expansionary monetary policies under economic embargoes fuel inflation and adversely affect the national economy.

Contractionary policies can also spell trouble for the national economy under sanctions. This is because moves to weather recession will be hindered by these policies although they can help bring inflation down.

Hence, CBI should neither focus on expansionary nor contractionary approaches rather it should consider different variables and formulate 'conservative policies' to regulate and stabilize the national economy.

The coming fiscal year will be filled with impending incidents since the odds of reaching a nuclear deal between Tehran and major world powers will have a profound impact on the national economy.

If the two sides, which are in talks to hammer out a final nuclear deal by July 1, 2015, can not come to an agreement, the CBI had better maintain liquidity growth rate between 22 and 23 percent.

Under such conditions, expansionary monetary policies will fail to stimulate the national economy and, consequently, push inflation up, while contractionary approaches will hinder economic growth.

However, the CBI should adopt contractionary policies if Iran and the United Nations veto-wielding powers plus Germany can sign a comprehensive nuclear deal by the deadline.

Once the two sides clinch a deal, Iran will see considerable growth in foreign investment and its economy will boom. Consequently, inflation rate will decline and the foreign exchange market will become stable.

Even though contractionary monetary policies hinder economic growth rate in the short term, they will lead to economic prosperity in the long run. Likewise, the CBI will be able to attain a one-digit inflation rate.

On the whole, the CBI should gear up for maintaining a tight rein on liquidity and contract it if Iran and the West arrive at a final nuclear deal. However, the levels of contractionary monetary policies should be thoroughly debated.

   
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