Iran’s inflation challenge is no longer explained only by the growth of liquidity. Recent monetary data show that changes in the composition of liquidity and faster circulation of money have become increasingly important factors shaping price pressures in the economy.
An analysis of Central Bank of Iran data over the past decade shows that the share of money compared with quasi-money has increased significantly, while the real value of liquidity has declined. These trends indicate that more financial resources are being held in highly liquid forms, reflecting growing concerns about inflation and uncertainty over the economic outlook.
In simple terms, Iranian households and businesses have become less willing to keep their savings in long-term bank deposits. Instead, they prefer assets that can be quickly converted into goods, foreign currency, gold, housing or other investments that may protect their purchasing power.
This shift has increased what economists describe as the “hot money” component of the economy. Hot money refers to funds that are easily available for spending and can quickly enter markets when expectations change.
While liquidity growth remains one of the main drivers of inflation, economists argue that the relationship between liquidity and prices has become more complicated in Iran. The speed at which money moves through the economy, known as money velocity, has gained greater importance.
Key Indicator
One key indicator of this change is the decline in real money balances. This measure, calculated by adjusting nominal liquidity for inflation, shows the purchasing power of existing money holdings. When real money balances fall, it means prices are rising faster than liquidity, reducing the value of money held by households and companies.
In a high-inflation environment, holding domestic currency becomes costly because its purchasing power declines over time. As a result, people tend to shorten the period they keep cash and move their funds more quickly into goods or financial assets.
This behavior increases the velocity of money. As money circulates faster, each additional increase in liquidity can have a stronger impact on inflation.
Iran’s experience follows a pattern seen in several countries with long periods of high inflation. In economies such as Argentina and other Latin American countries, rising inflation expectations reduced demand for domestic currency and encouraged people to move savings toward alternative assets. This increased money circulation and intensified inflationary pressures.
Another sign of changing expectations in Iran is the growing share of money compared with quasi-money. Liquidity in Iran consists of two main parts: money, including cash and immediately available bank deposits, and quasi-money, mainly long-term deposits that are less easily accessible.
At the beginning of the Iranian year 1395 (March 2016), the ratio of money to quasi-money was around 14%. By the beginning of the current Iranian year (March 2025), the ratio had increased to nearly 34%, rising almost two and a half times.
Shorter-Term Strategies
The increase suggests that economic actors have adopted shorter-term financial strategies. Instead of locking their funds in long-term deposits, they prefer greater flexibility to respond to possible inflationary risks or market opportunities.
Before 1399 (March 2020), the ratio remained relatively stable, as inflation was more predictable and bank interest rates provided some protection against the decline in purchasing power. However, as inflation accelerated in recent years and real interest rates turned negative, long-term deposits became less attractive.
Although the Central Bank increased deposit rates in late 1401 (March 2023), the impact was temporary. Higher rates encouraged some movement from money into quasi-money, but the trend did not last because inflation expectations remained strong and real returns became negative again.
This shows that depositors’ decisions are not determined only by nominal interest rates. Expectations about the future of the economy play a major role. When people believe inflation will remain high, even higher bank rates may fail to encourage long-term saving.
Lesson for Policymakers
For policymakers, the challenge is therefore broader than controlling liquidity growth alone. Restoring confidence, reducing inflation expectations and creating economic stability are essential to encourage people to hold more long-term savings.
Without a change in expectations, increasing liquidity may continue to have stronger inflationary effects because money is moving faster through the economy. In such conditions, managing the quality and behavior of liquidity becomes as important as controlling its overall size.
