Stabilizing the Nominal Rate Is Not Enough; Central Bank Brings Exchange Rate Back to Lower Levels

A currency expert, stressing the anchoring role of the exchange rate in Iran's economy, said the Central Bank's responsibility is to lower the rate and strengthen the national currency to definitively curb inflation.

According to Mehr reporter, despite the relative drop in the monthly acceleration of inflation at the end of the first half of the year and the temporary curbing of liquidity growth, economic experts believe that as long as the general level of the exchange rate is not adjusted and the value of the national currency is not restored, it will be impossible to achieve lasting stability in the commodity markets. In the structure of Iran's economy, where inflationary expectations and the cost of production are inextricably linked with the currency price, releasing the market or stopping the stabilization of high prices cannot protect people's livelihoods and producers' profit margins from the next waves of inflation. In this regard, Sohrab Al-Barzi, an expert on the money and foreign exchange market, in an interview with Mehr reporter, referring to the main root of price fluctuations in different markets, said: The reality of the structure of Iran's economy shows that the exchange rate is not only a financial asset, but also the basic anchor of expectations, the indicator for determining the finished price of the production chain, and even the pricing criterion for immovable assets. It is not possible to claim inflation management by simply relying on the contractionary policies of the banking network's balance sheet and accepting high exchange rate figures. The real brake on inflation will be pulled when the central bank seriously puts its essential and fundamental duty of protecting the value of the Rial and strengthening the purchasing power of the national currency on the agenda.

Emphasizing that the mere stability of high figures does not solve a knot of livelihood problems, he added: "Unfortunately, during the past periods, sometimes this false proposition has been promoted that the Central Bank has only the task of maintaining the nominal stability of astronomical rates, while different levels of production and consumption have suffocated with high rates." Currency jumps in the past months have directly raised the cost of logistics, raw materials and basic goods, pushing point-to-point inflation to over 80 percent. If the currency policymaker does not intervene to reduce the rate and does not allow the prices to return to reasonable levels, this heavy burden of cost will remain on the shoulders of the society and it will ignite again in the smallest external impulses.

This foreign exchange expert stated: the central bank has market management tools and reducing the exchange rate is not just a wish, but it is completely possible by reforming the management of currency allocation, monitoring the flow of Rials, and blocking speculation channels. When the importer or producer sees the currency horizon going down or at least in a decreasing and increasing value path for Rial, the incentive to hoard goods and pricing based on emotional bubbles disappears. On the contrary, fixing the high figures gives the wrong message to the market that prices will not fall further, and as a result, all sectors synchronize their pricing with the worst-case scenarios.

At the end, referring to the legal obligation of the monetary policy maker to strengthen the value of the national currency, Al-Barazi reminded: According to the explicit duties of the central banking, maintaining the purchasing power of the national currency and creating a stable balance in the balance of payments is the basic mission of this institution. The central bank is obliged to manage the exchange rate decline by actively managing the supply, controlling the Nima and consensus market, and dealing with informal pricing. As long as this goal is not achieved and the value of the national currency is not restored, curbing the monthly acceleration of inflation will be fragile and any relaxation in the goods and services market will remain short-term and unstable.