Why High Inflation may Return to Iran

Yet, what seems to have been absent in remarks made by Iranian banking officials in recent weeks is the potential negative impact of the falling interest rates on inflation. Indeed, the CBI is now being warned by some analysts against looming growth in the country’s money supply and a possible return of high inflation.

According to the latest CBI data, money supply grew by 27.2% in the 12-month period ending Jan. 20 — the highest in the past 12 to 18 months. Money supply has grown every month the current Iranian calendar year (that started March 20, 2015) by 2% on average, but in the month to Jan. 20, it grew 0.8% higher than the average. In this vein, there are fears that the money supply will increase from around 9.5 quadrillion rials ($331.49 billion) in the month to Jan. 20 to 10 quadrillion rials ($331.47 billion) by year-end (March 19), said Abolghasem Hakimipour, a lecturer at Allameh Tabataba’i University, in a recent interview with Mehr News Agency.

Of note, money supply has increased by more than 4 quadrillion rials ($132.59 billion) since Rouhani took office as president in July 2013, according to Masoud Mirkazemi, a parliamentarian and former minister of petroleum. Yet surprisingly, inflation has been plunging ever since. One of the reasons that inflation has decreased — despite the ongoing growth of money supply — is that a large part of the money supply is locked in banks.

Indeed, nearly 86% of the money supply, in the first and second months of the current Iranian fiscal year, pertained to money held in long-term saving accounts, which can be converted into cash, with a delayed inflationary impact. Hence, the CBI must be on alert. Since the deposit rate is set to fall further, more cash is likely to leave the banks. And as the money supply determines the level of prices and inflation in the long run, the CBI has to be very careful while adopting an expansionary policy to guarantee stability in the manufacturing sector.

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