News ID: 112569
Published: 0737 GMT February 25, 2015

Blessing of effective monetary policy

Blessing of effective monetary policy

By Reza Boostani

Iran's foreign exchange market is experiencing minor fluctuations despite a sharp fall in profits from plummeting oil prices.

Black gold that was sitting at over $100 per barrel in the middle of last year registered an almost about 60 percent decline till late January. However, it slightly rebounded in early February.

Financial and monetary pundits have cited a number of variables as the causes of relative price stability in the hard currency market.

Pundits are assuming that the tight rein of the Central Bank of Iran (CBI) on the forex market has averted impending crisis.

However, ample evidence rejects the veracity of their assumptions. A glance at the CBI's performance under the former administration (2005-13) can shed light on the issue.

The Iranian currency, the rial, registered about 400-percent depreciation against hard currencies until the middle of 2013. This was triggered by the imposition of tough US-led sanctions and the mismanagement of the then administration.

The then-CBI exhausted all means to avert the devaluation of the rial, but its attempts failed. The CBI made futile attempts to arrest the spread of forex crisis by injecting foreign currencies into the market. Hence, the ongoing stable conditions in the forex market can not be attributed to CBI intervention.

Arguably, the odds of maintaining the relative stability in the forex market are rooted in the monetary and fiscal policies devised by President Hassan Rouhani's administration.

Since the incumbent government assumed office in August 2013, it has implemented two effective measures to nip the forex crisis in the bud.

The reduction in inflation rate from 40 percent (under the ex-government) to below 20 percent is the first measure that has forestalled wild fluctuations in the forex market. Galloping inflation had given rise to growing problems in the forex market.

The second measure pertains to the approaches that have affected bank interest rates. During the tenure of the former president Mahmoud Ahmadinejad, interest rates underwent wild upheavals. The collapse in the value of the rial prompted investors to withdraw their deposits from the banking system and invest in the forex market. This exacerbated the situation.

However, the CBI has determined interest rates that have helped banks attract liquidity and overcome deepening crisis in the forex market. The rates hover between 10 percent and 22 percent depending on short- and long-term deposits.

Attempts to bring the current rates down might spell trouble for other financial sectors, such as the forex market.

The Rouhani administration increased interest rates, which indicates that banks face financial difficulties. This is because the rise has helped them offset their financial shortage.

A likely progressive decline in interest rates can herald the alleviation of financial problems afflicting the banking system.

On the whole, the CBI is pursuing financial approaches in line with developments both in the banking system and the forex market.

Undoubtedly, these approaches are watertight and meet Iran's monetary needs.

   
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