Government’s new monetary policy bringing stability, keeping interest rate low

Recent changes in Iran’s macroeconomic condition, had made it practically impossible for the government to continue an anti-recession monetary policy. Thus, in a courageous move, domestic policymakers began employing new monetary measures focusing on stabilizing the macro-economy by reducing money supply and, consequently, increasing the nominal interest rate.

Any delay in the adoption of this policy would have imposed a heavy cost on the national economy.

Fluctuations in domestic forex market in the past few months, currently described as the reason for the change in Central Bank of Iran (CBI) policies, indicated instability in the national economy. The latest policies, however, pursue more important goals than merely achieving market stability.

Among the other signs of weakening of the macroeconomy were the rise in price indices and the increase in prices in the housing sector. At a time when a longterm trend had emerged in production growth, the continuation of anti-recession policies could have led to greater instability in the main markets of the domestic economy and double-digit inflation rates. The latest measures seek to ensure stability in the macro-economy — a target aimed for and paid attention to by a large number of the central banks in the world.

Today, the rise in interest rate is being pursued deliberately, as a policy. Perhaps, some experts disapprove of the move due to the importance they attach to boosting production. Nevertheless, the continuation of the earlier trend would lead to a rise in inflation which, per se, could make the option of raising interest rates a must. In case such a scenario had unfolded, neither the interest rate would have remained low nor could the present stability have been achieved.

The new policy is, of course, not in contradiction with the reform measures introduced a long time ago. The CBI is still capable of adopting reforms in the banking network to lower the real interest rate. Reforms that enhance the motivation to save and optimize the allocation of resources to production-oriented investment projects, are capable of guaranteeing a reduced interest rate in the long-run. On the other hand, long-term stability in an economy is an important prerequisite for enacting structural reforms. In the absence of such a stability, any move to reform, whether in the banking network or other sectors of the domestic economy, would fail to produce favorable results.

To make optimum use of the opportunity provided in light of implementing the new policies, reforms in the banking network are required to be implemented at a greater pace. Recent developments in the domestic economy showed that the achievements accomplished assiduously over a long period of time are capable of fading into oblivion easily and rapidly.

The dependence of the domestic banking network and the government on financial resources of the CBI is among the factors destabilizing the monetary sector. It would be unrealistic to expect that production-stimulating and employment-generating plans would yield results in such an environment. Thus, the government should grasp the opportunity and undertake the desired reforms while the time is right.

*Reza Boostani is an Iranian economist. The article first appeared in the Persian daily Donya-ye Eqtesad.