Speculation is mounting that there may soon be a change in the leadership of its Central Bank of Iran due to increasing friction between the bank's governor, Mohammadreza Farzin, and his predecessor, who now heads a top position in the Pezeshkian cabinet. 

Under Iranian law, the governor of the Central Bank is nominated by the economy minister and appointed by the President. President Masoud Pezeshkian appears to be among the few presidents in Iran who have opted not to replace the CBI initially, likely out of respect for the independence that the regulatory body aims to achieve following the implementation of the new central bank law.

However, this independence now seems to be under strain as disagreements with the Economy Ministry intensify over key fiscal policies, particularly regarding exchange rates in the secondary market (NIMA) and interest rates. The debate has emerged as a significant challenge among shareholders in Iran, with investors voicing concerns over conflicting signals from the government and the bank, EcoIran reported.

The CBI has maintained its stance on a more controlled approach to exchange rates, especially in the NIMA market, where exporters allocate foreign currency for imports. Farzin argues that stabilising NIMA rates helps protect consumers from inflation, but his critics, including Minister of Economy Abdolnasser Hemmati, contend that the gap between the NIMA rate and the open market rate should be reduced.

The stock market has not been immune to the consequences of this stance. Investors, already grappling with economic uncertainty, have reacted negatively to the lack of a unified approach from key economic bodies. Erfan Kazemzadeh, a market analyst, highlighted the confusion in a recent interview with EcoIran, stating that the divide between the Central Bank and the Economy Ministry is becoming increasingly apparent, undermining confidence in the market.

Former CBI chief and current economy minister, Abdolnasser Hemmati, has publicly criticised the current gap between the NIMA rate and the free market rate. Hemmati has called for a narrowing of this discrepancy, arguing that the wide gap is both unsustainable and detrimental to the country’s exporters.

This sentiment is echoed by some proponents of open market mechanisms, including Ali Tayyebnia, President Pezeshkian’s chief economic advisor, who argues that artificially controlling currency exchange rates does more harm than good in the long run. These voices contend that market-driven rates would provide greater stability and predictability, particularly for exporters currently suffering from selling goods at a lower NIMA rate, which erodes their profits.

Conversely, Farzin has continued to defend his cautious approach. In remarks to parliament, he underscored the importance of managing inflation and protecting consumers from the immediate price hikes that would result from a steep rise in NIMA rates. However, Mohammad Baqer Qalibaf, the parliament speaker, recently argued that by keeping the NIMA rate artificially low, the government is fostering a black market for foreign currency, exacerbating inefficiencies and causing further distortions in the economy.

The debate extends beyond exchange rates to interest rates as well. Farzin’s policy of raising interest rates has also drawn criticism, with some arguing that it has resulted in stagnation in the stock market, no matter how it helped the CBI control the inflation rate. Yet, Farzin has resisted these calls, warning that lowering interest rates could stifle economic growth and harm businesses, particularly small and medium-sized enterprises.

So, what might the future hold for Farzin and the Central Bank? One possible scenario, favoured by many observers, is that Farzin could be replaced by someone more aligned with Hemmati's views on exchange and interest rates, potentially paving the way for a more market-oriented approach; this, in turn, may raise more questions about the central bank's impartiality.

That move would likely involve narrowing the gap between the NIMA and open market rates, which could appease exporters but might fuel inflation in the short term.  Alternatively, if Farzin manages to hold his ground, we could see continued intervention in the currency market, with the Central Bank maintaining its role in setting exchange rates, albeit with the risk of further market distortions and black-market activity.