After weeks of wild rallying, the US dollar has lost its bullish momentum in Tehran’s foreign exchange market as the Central Bank of Iran’s rescue package appealed to investors anxious about a slide in the value of rial.

According to market reports, the rial continued to gain against the greenback on Monday and was quoted at 45,750 to the dollar, having gained about 300 rials against the American currency in the past four days.

At the height of the forex market volatility last Tuesday and just before the unveiling of the CBI package, the rial was traded at 49,000 to the greenback, having plunged 14% since the start of 2017.

The central bank’s package, long overdue according to some analysts, saw a reversal of the regulator’s loose monetary policy adopted in September, which forced banks to reduce their deposit and lending rates.

Banks have now been authorized for two weeks to offer interest rates of up to 20% on one-year deposits against the previous 15%. The bank had earlier argued that as inflation had dropped to single digits after a quarter century, so should interest rates.

The rate cut was implemented despite warnings by some economists that it would make the monetary market less appealing to investors and encourage them to move their capital to currency and housing markets.

“I think the bearish trend in the foreign exchange market will continue since CBI’s forex package is working, but in order to sustain this trend, interest rates should stay high,” says Pouya Jabal-Ameli, an economist with the CBI who pushed for the approval of the package by the bank’s policymakers.

The economist hopes that the interest rate rise will be extended beyond its two-week limit, noting that banks have fallen in line with the move and they possess the resources to cover the interest payment to their customers.

According to Jabal-Ameli, investors have come out in droves to move their deposits into long-term accounts, which has reduced demand for the foreign currency.

The forex volatility had caused widespread concerns among the public and investors that the government was no longer capable of calming the market through central bank forex reserves and revived fears of price rises and economic disillusionment.

CBI Package

CBI’s forex package also includes the issuance of rial-based foreign currency bonds and the sale of gold coins at attractive prices.

The business community, which has blamed the situation on the government’s habit of keeping the rial overvalued at the expense of domestic production, this week expressed doubt about the long-term efficacy of CBI’s measures.

Gholamhossein Shafei, the head of Iran Chamber of Commerce, Industries, Mines and Agriculture, also warned the central bank to cover the costs of the generous rate increase and not pass the hat to the business community.

Chairman of Majlis Economic Commission Mohammad Reza Pour-Ebrahimi also disapproved of CBI’s measures, describing it as the “coup de grace” to the country’s production sector.

Pour-Ebrahimi told reporters that the move was a step backward and nullifies all the efforts of the government and the Money and Credit Council–a decision-making body–aimed at reducing rates.

The lawmaker noted that the sudden rate increase would be a blow to the stock market’s growing index and inevitably raise the cost of lending for businesses.

Pour-Ebrahimi hoped that the government would reconsider its decision or else the parliament would act by passing a legislation.

Return of Calm

Valiollah Seif, the CBI governor, said on Monday that in the wake of his bank’s measures, the forex market has reached a “balanced and appropriate” condition.

Referring to last week’s police crackdown on currency market, the CBI chief reiterated that sensitivity over activities that could lead to money laundering and financial murkiness exists in all countries.

Seif also predicted that in the coming days, the forex market would become calmer and pave the way for “economic stability”.

Last week, Tehran Police, at the behest of the central bank, raided the hub of Tehran’s currency hawkers near the British Embassy in Tehran and rounded up 90 traders who were deemed market disruptors.

Authorities also closed the bank accounts of 775 people suspected of distorting the foreign exchange market with capital movements totaling 200 trillion rials ($4 billion).

Source:

2018, USD Bearish as CBI Measures Sink In, Wednesday, February 21, p.1,<https://financialtribune.com>