Iran exchange rate volatility and central bank response

Officials from the Central Bank of Iran have identified deep-seated structural issues contributing to rising exchange rates and currency volatility. Mehdi Darabi, an assistant to the Chief of the Central Bank, previously attributed the instability to decades of accumulated imbalances, chronic government budget deficits, and a shift from being a net exporter of fuel to a net importer, noting that the wartime environment has damaged domestic industries.

In recent updates, Darabi, acting as assistant to the head of foreign exchange, stated that when adjusted for inflation, current real exchange rates are comparable to levels seen in 2018 and 2020. He identified four primary drivers for the currency outperforming inflation: precautionary demand, speculation, delays in goods importation, and delays in the return of export earnings. The bank maintains that current rates do not fully align with fundamental economic variables, citing psychological pressures and uncertainty as primary drivers.

To manage liquidity, the Central Bank has utilized open market operations and regulated credit. Notably, the interbank interest rate has remained at its 24 percent ceiling for six consecutive weeks, suggesting high demand for short-term liquidity within the banking network. The bank continues to emphasize its goal of maintaining stability through authorized interventions in gold and foreign currency markets to align the market with economic realities.