Iran’s central bank is trying to bring inflation under control by limiting money creation, tightening supervision of troubled banks and directing credit towards productive businesses. However, the strategy is unlikely to succeed unless the government also reduces fiscal pressure and supports banking-sector reform.

Central Bank of Iran Governor Abdolnasser Hemmati said the bank’s main objective was to reduce inflation and inflation expectations. “The central bank’s fundamental goal is to control inflation and inflation expectations while preventing a recession and negative economic growth,” Hemmati said during a meeting with economists.

One of the bank’s measures has was raising the reserve requirement for commercial banks by a total of 1.5 percentage points in two stages. This means banks must keep a larger share of their deposits at the central bank and have less money available for lending. The main goal of the policy is to slow credit growth and reduce the creation of new money within the banking system. But the policy will only work if financially weak banks are prevented from bypassing the restrictions by borrowing more from the central bank.

Hemmati referred to the imbalances in the banking sector as a major source of inflation. Several Iranian banks hold large volumes of property, frozen assets and non-performing loans. When they cannot meet their day-to-day obligations, they often rely on central bank overdrafts, which increase the monetary base and add to inflationary pressure, he said.

The latest figures show the scale of the problem. Liquidity has grown by 56%, while the monetary base has expanded by 61.5%. The money multiplier stands at 7.095.

The interbank interest rate has also reached 23.97%, close to the top of the central bank’s 24% policy corridor. This reflects tighter liquidity conditions, but it also raises banks’ funding costs and can make loans more expensive for businesses.

This is while, the central bank is trying to avoid cutting businesses off from finance. It plans to expand supply-chain financing, electronic treasury bills, factoring and credit certificates, which allow companies to obtain working capital without relying entirely on conventional bank loans. According to the officials, around IRR1,430 trillion was provided through supply-chain financing instruments last year, while capacity of approximately IRR6,700 trillion has been planned for the current year.

Many economists claim that inflation in Iran is also driven by government budget deficits, compulsory lending imposed on banks, exchange-rate instability and political uncertainty. The central bank’s strategy is therefore technically credible, but its success depends on whether the wider government is prepared to accept the economic and political costs of reform.