Warning from the Parliament Research Center Regarding the Emergence of 'Runaway Inflation'

The Parliament Research Center issued a report warning of the emergence of 'runaway inflation' by the end of this year, citing 'the quantity and quality of money supply growth in recent years, fluctuations in the currency market, and rising prices in recent months.' The report states that the volume of liquidity has increased from 506 trillion tomans in mid-2013 to over 1672 trillion tomans, indicating more than a threefold increase in liquidity during this period. According to the report, the growth of liquidity in the years following mid-2014 has been accompanied by a high share of quasi-money, with the average ratio of money to quasi-money reaching about 15 percent. The report further notes that 'this liquidity composition, along with a decrease in the velocity of money circulation due to high bank interest rates, has delayed inflationary effects.' However, if 'the liquidity composition changes and the share of money increases or the velocity of money circulation rises, it could lead to runaway inflation, evidence of which was somewhat observed in the first half of this year.' To manage liquidity in order to control inflation, the Parliament Research Center has proposed measures focused on 'reducing the volume of liquidity,' 'managing and controlling existing liquidity,' and 'managing the creation of new liquidity.' To implement these suggestions, the center has recommended that banks sell their surplus assets, control large banking transactions, and strive for stability in the currency and gold markets. Other recommendations include a capital gains tax on currencies, gold, and real estate, allowing for the opening of two-year or longer investment deposits, and reducing interest rates on short-term bank deposits. Abdolnaser Hemmati, the Governor of the Central Bank of Iran, mandated banks to settle their overdraft balances with the central bank in a directive issued on October 1st. Hemmati emphasized 'monetary discipline and inflation control,' stating that 'the cooperation of banks in managing their overdrafts from central bank resources has led to a decrease in overdrafts compared to the previous month.' He criticized 'the performance of some banks and credit institutions in increasing the imbalance in resource management,' describing negative balances in banks' current accounts with the central bank as 'contrary to the goals of the central bank and in clear contradiction with the central bank's objectives and inflation control policies.' The overdrafts of banks from the central bank's resources stem from a lack of proper management of bank resources and expenditures, which not only exposes the economy to high liquidity risk but also has a severe inflationary effect due to the growth of the monetary base. One of the current concerns in the Iranian economy is the change in the liquidity composition from quasi-money towards money and the withdrawal of bank deposits for speculative profit, which could lead to increased inflation in the coming months. According to the Statistical Center of Iran, the average inflation rate in December this year reached 18 percent, which is an increase of 2.4 percentage points compared to the 12-month inflation rate in November. The point-to-point inflation rate for December this year was reported at 37.4 percent.