Inflation likely to rise in Rouhani’s Second Term

By Bijan Khajehpour for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

In terms of economic management, containing inflation has been one of the most significant achievements of Iranian President Hassan Rouhani’s first term in office.

The Rouhani administration managed to reduce inflation from close to 40% in mid-2013 to 7.2% in the Iranian year ending on March 20, 2017. As a result, Iranian politicians have been promising a single-digit inflation rate over the next few years that would help stabilize the country’s economy.

However, the first quarterly report on inflation has raised eyebrows. According to the latest report of the Central Bank of Iran (CBI), inflation in the 12-month period ending June 21 was 10.2%, and inflation in the last month was 0.3%. Neither of these figures are alarming — indeed, the Majles Research Center (MRC) had predicted that inflation in the current Iranian year would reach 10.9%.

However, the question is whether a sustained single-digit inflation rate is realistic in the Iranian economy. Iran has experienced such low inflation only twice (including last year) since the end of the Iran-Iraq War in 1988 and the country has lived with inflation above 10% for most of the past three decades. This article will look at the determinants that will influence inflation in the Iranian economy and how they will interact in the next few years under Rouhani’s new government.

First and foremost, the key indicator is the money supply. Iran’s cash-based economy provides a major challenge in reducing inflationary pressure. Experts agree that in the past four years, three CBI policies have helped contain inflation in Iran: managing the money supply, maintaining relative stability in the foreign exchange rate and gradually reducing bank interest rates from their peak of 26% to some 15% currently.

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