Opportune Time for Launching OMO

(Monday, April 15, 2019) 09:13

Conditions have never been as favorable as they are now for the Central Bank of Iran to launch the much-touted Open Market Operation policy, a financial expert says.

Kamran Nadri said the market for government-issued securities is robust enough to launch the OMO because the government issued a bulk of securities in the previous years and plans to issue more in this fiscal (started March 21), IBENA reported. 


CBI Governor Abdolnasser Hemmati has often said that the regulator plans to launch the OMO in the current fiscal. In an Instagram post Friday he forecast positive results for the OMO if the government regularly sells bonds in the market.   


In a talk with reporters he said the CBI will launch the OMO this year as part of its latest effort to regulate the monetary market. According to Hemmati, the plan is on the agenda of the Money and Credit Council – a top monetary decision-making body. 


OMO is a financial instrument through which central banks buy and sell securities in the open market to expand or reduce money supply. 


Within the OMO, the CBI buys government bonds to increase the money base (cash reserves), thereby reducing inter-banking lending rates. On the other hand, selling government bonds decreases the base money and raises interbank rates. 


Major Players 

Government, banks, and the CBI are three major players in the OMO, said Nadri. “The government issues bonds to be later used by banks as collateral to borrow from the CBI. In the final step, the CBI decides the interest rates or the price of bonds.” 


Nadri emphasized that it should be the CBI that sets the interest rate or price of bonds, warning that government intervention in this regard would render irrelevant the regulator’s effort to curb inflation and control the currency market. 


“The government may press the CBI to offer bonds at low interest rates and high prices. The CBI should implement the policy in tandem with economic conditions regardless of political and other pressures,” he said. 


During a meeting of the Supreme Council of Economic Coordination -  a body comprising heads of three branches of government formed to address major economic issues  -  last October , permission was granted to the regulator to undertake OMO according to which it can trade in Islamic bonds issued by the government as part of a plan to help implement monetary policies.


The initiative is seen as part of the current fiscal budget law. As per the law, “in order to implement monetary policies and control interest rates and inflation, the CBI will launch the OMO and trade in Islamic bonds issued by the government.”