Financial base" and "liquidity"; correcting a common perception.
The Governor of the Central Bank saw in the memorandum the analysis of the relationship between the monetary base and liquidity as requiring reference to the factors that influence the creation of liquidity and the manner in which the balances are placed and said: liquidity is not the result of the mechanical doubling of the monetary base with a fixed "growth factor". The multiplier simply shows the ratio between the liquidity and the financial base; But this is not a sufficient explanation for the mechanism of creating liquidity.
Abdul Nasser Hammati continued the comment and added: Most of the liquidity is created during the crediting of the banks and the creation of deposits resulting from this, and the banks need reserves in the central bank to settle payments and fulfill the obligation of legal reserves. Therefore, the increase in credit and the resulting deposits can also increase the demand for the monetary base.
By increasing the legal reserve ratio, banks must hold more reserves for a given amount of deposits. Providing this additional need causes the financial base to grow at a higher rate than the liquidity; But from the high growth of the monetary base alone, it is not possible to deduce the high and proportional growth of liquidity in the future.
This explanation does not change the necessity of reducing liquidity growth. Stable containment of inflation and the stabilization of inflationary expectations require controlling the growth of liquidity, including by correcting accumulated imbalances in the budget and off-budget, in the banking network and in the other sectors of the economy. As long as these dissatisfactions lead to a continued expansion of credit and deposits, the pressure to put up reserves will continue.
Limiting the supply of reserves, without curbing the factors that create the need for it, could transfer pressure to the interbank market and bank overdrafts. However, meeting the needs of the banking network does not mean an unlimited and unconditional supply of reserves. The banks' final rate of access to reserves is of central importance; Because it affects the cost and motivation of extending credit.
From this point of view, the source of supply of the reserves is also important: provision of reserves from increasing net foreign assets of the central bank, its net claims from the government or operations in the open market, can have different effects on the banks' need to borrow and the cost of placing the reserves.
Supply management, the rate and conditions of access to reserves, along with monitoring the banks' balance sheets, should be used to reduce liquidity growth and curb inflation.