The Central Bank of Iran, in accordance with the government’s approach in controlling inflation and by applying appropriate monetary policies, has contained the level of liquidity and therefore controlled the monetary base. A sharp decline in liquidity (through absorption of money from society by the Central Bank and the government) can lead to recession, increase in the cost of money (interest rate) and as a result diminish the volume of transactions in the capital market, which if continued, can have devastating effects on this market and the country’s economy as a whole. On the other hand, unrestrained increase in the volume of money in the society (through various expansive monetary policies) can direct a major part of this liquidity towards secondary markets and unproductive markets such as markets for foreign currencies and gold coins, and in addition to an uncontrollable inflation, it can also divert a large volume of the money that was invested in the capital market towards these markets and thus lead to recession in the market.



Central Bank’s monetary instruments for the upcoming year are as follows:

Rate of legal reserve: According to the law, banks are obliged to keep a percentage of people’s deposits as legal reserves at the Central Bank and use the rest of the deposits to perform their banking activities and to develop the volume of money. The higher the rate of legal reserve, the lower will be the development of the money volume, and the smaller this rate, the greater the money making power of banks will become. Therefore, Central Bank can, by changing the rate of legal reserves, alter the money multiplier and consequently the volume of money. As a result, based on Central Banks expansionary monetary policies to control economic recession, Banks rate of legal reserves have been diminished from 13% to 11%, and it is anticipated that during 2016, this rate will be reduced by another 2%, indicating that in this regard the government will be applying expansionary policies during the coming year.


Interest Rate: interest rate is an effective factor in economic analyses and also in determining the time value of money. In general, by increasing the interest rate we can expect the capital to be attracted towards banks and assets with stable return and therefore cause recession in the capital market, which in turn will have a negative impact on the revenues of brokerage firms. In other words, an increase in the interest rate will raise the anticipated return and therefore reduce the P/E multiplier.

Since the banking interest rate in Iran is commanded by the policies of the Money and Credit Council, therefore it cannot be predicted by models for the demand and supply of money. The rate of return for long-term bank deposits between the years 2003 and 2010 have been between 16 to 17 percent. But this rate was reduced to the level of 15% during 2011 and in 2012 was suddenly increased to 20%. In 2014 considering policies by the government and the Central Bank to reduce inflation, banking interest rate was considerably increased in order to attract free capital; the following table demonstrates the rate of return for 5-year bank deposits:


2005 2006 2007 2008 2009 2010 2011 2012


2014 2015
Rate of return on deposit 17% 16% 16% 16% 16% 16% 20% 20% 22% 22% 20%



  • Due to the current high interest rate in the country and the attraction of liquidity from the society and gathering them in bank accounts, the flow of liquidity has been reduced in the country and the final cost of money for industries has become high; therefore, in order to stimulate the industry, the interest rate has to be reduced to cover the financial needs of the industries. As a result, long term bank rate in Iran is 17% and due to the goal of containing the liquidity pursued by the government and the Central Bank, it is expected that the mid-term interest rate will be determined between 15 to 17 percent for the coming year.


  • By eliminating sanctions, it will become possible to have foreign exchange relations and therefore, those active in industrial and commercial domains will be able to provide their required foreign exchange resources based on LIBOR, and thus pay a facility cost of 4 to 5 percent, which will reduce their need to use domestic banks loans in IRR due to the high level of loans interest rates. As a result of the reduced demand for IRR, the cost of money for industries will diminish, which will result in a reduction in bank interest rates and so the interest rate of 15 to 17 percent for the next year seems rational.




Open Market Operations: Trade of government bonds in the free market is performed by the Central Banks of countries in order to expand or contract the level of money in the banking system. The purchased of securities by the Central Bank is an expansionary monetary policy and will lead to the injection of money to the banking system and therefore increases the volume of money in the market, whereas the sale of securities is a contractionary monetary policy and reduces the amount of money in the market. During 2015, the government implemented a contractionary policy by issuing Islamic Treasury Bills.