Central Bank's Currency Intervention Helped Reduce Dollar Price / Inflation Reduction Will Not Be Significant Without Addressing Fundamental Factors

Following the recent drop in exchange rates, the Central Bank governor announced that this trend will continue. Economist Kamran Nadri believes that the release of part of the Central Bank's foreign currency reserves has helped lower the exchange rate, but the continuation of this path depends on economic conditions and developments in foreign trade.

According to Ambassador Arjan, after the increasing fluctuations of the foreign exchange market in recent weeks, the drop in the dollar price in the past days was a sign of the effect of the central bank's foreign exchange interventions on the market developments. Abdolnaser Hemmati, the Governor General of the Central Bank, also announced the continuation of this institution's actions to reduce the price of currency in the past days; A position that emphasizes the pursuit of foreign exchange policies with the aim of curbing market fluctuations.

However, the continuation of the downward trend of the currency market depends on factors beyond short-term interventions; From the amount of usable reserves of the central bank and oil revenues to the state of foreign trade and the level of foreign exchange demand. Now the question is, to what extent can the central bank, by continuing its actions, curb the rising trend of currency prices and turn the recent decline into a sustainable trend?

The central bank has introduced part of its foreign exchange reserves to the market and this action has helped to reduce the exchange rate

Kamran Nederi, an economic expert, referring to the drop in currency prices in recent days, told Ambassador Arjan: "The central bank has introduced a part of its foreign exchange reserves to the market and this action has helped to reduce the price of currency." However, the exact information about the amount of currency injected into the market is not available.

The major part of foreign exchange demand in the market is allocated to traders and importers of goods needed by the country from abroad

Nederi said about the possibility of continuing the downward trend in currency prices: "It is difficult to predict the future path of the currency market. Most of the foreign exchange demand in the market is allocated to traders and importers of goods needed by the country from abroad, and if this demand decreases, we can expect the rate of exchange rate increase to decrease.

In the event of a full-scale war, commercial activity would slow down or stop, and as a result, commercial demand for currency would also drop.

Referring to the possibility of escalation of military conflicts, this university professor added: "In the event of a large-scale war, commercial activities will decrease or stop, and as a result, the commercial demand for currency will also drop." In such a situation, most of the remaining demand in the market will be dedicated to speculative demand. Considering the decrease in people's income, this part of the demand will probably have a limited effect on the market.

A decrease in the volume of foreign trade can reduce the speed of the currency price increase, but it does not necessarily lead to a decrease in the currency price

This economic expert emphasized: "Decreasing the volume of foreign trade can reduce the rate of increase in the price of the currency, but it does not necessarily lead to a decrease in the price of the currency; Due to the high inflation and the possibility of a decrease in oil revenues due to the maritime blockade, it is expected that the increasing trend of currency prices will continue in the coming years. However, this prediction is not certain.

The central bank uses its efforts to manage the currency market

In response to the question of whether the central bank will be able to manage the currency market if the current conditions continue, i.e. neither an all-out war nor reaching a comprehensive agreement, Nedri said: "The central bank is doing its best, but the amount of usable currency reserves and the possibility of supplying them in the current situation are very important."

If the sale of oil decreases or the income from it is not provided to the central bank in cash, the ability of this institution to intervene in the currency market will be more limited.

Referring to the dependence of the Central Bank's foreign exchange resources on oil revenues, this economic expert explained: "If the sale of oil decreases or the income from it is not provided to the Central Bank in cash, the ability of this institution to intervene in the currency market will be limited."

He also said about the state of currency banknote reserves: "The Central Bank has announced that it has the right conditions to supply banknotes to the market, but there is no detailed information about the volume of these reserves; If oil revenues decrease, the central bank's scope of maneuver to manage the currency market will be limited.

According to the existing conditions, the management of the currency market will be accompanied by difficulties

At the same time, he emphasized: "The central bank must make maximum efforts to manage the market within the framework of the assigned tasks and missions; However, according to the existing conditions, the management of the currency market will be accompanied by difficulties.

It is difficult to control inflation in the current situation

Nederi further stated about the point-by-point drop in inflation in September and October and the possibility of continuing this trend: "It is difficult to control inflation in the current situation. According to studies conducted in other countries, the increase in the average inflation rate is usually accompanied by an increase in its fluctuations; This means that the inflation rate and the exchange rate deviate more from their average.

High budget deficit, liquidity growth, maritime blockade and other fundamental factors are still important obstacles in the way of curbing inflation

Regarding the continuation of inflation reduction in the coming months, he said: "High budget deficit, liquidity growth, sea blockade and other fundamental factors are still important obstacles in the way of curbing inflation."

This economic expert emphasized: "If these conditions continue, the reduction in the inflation rate will not be significant, and the continuation of the downward trend in inflation depends on the elimination of the fundamental and limiting factors of the economy."

Read more reports on the macroeconomics page.