Policy Interest Rate and Inflation Targeting: Requirements and Preconditions

Achieving the central bank's operational goals is the necessary condition for controlling inflation and materializing sustainable economic growth because the efficient monetary policy depends entirely on it. According to the definition, a variable can be defined as the central bank's operational goal if, firstly, the central bank is willing to use it to achieve the ultimate goals and, secondly, the central bank has the ability to control and conduct it. According to this definition, the policy interest rate in the interbank market can be selected as the operational target. Given this feature and the importance of controlling inflation as the most important goal of monetary policy, many central banks in the world have chosen the inflation targeting as their monetary policy strategy and the policy interest rate as the operational goal. Since 1399, this approach has been implemented by the Central Bank of Iran. In order to review this strategy, first the features of the operational goals, tools and ways to achieve them and then the requirements and preconditions for successful implementation of inflation targeting are mentioned. Finally, the method of determining the policy interest rate and also the implementation of the inflation targeting policy in the Iranian economy will be examined. Recognizing this mechanism, it is expected that while considering the need to establish preconditions for inflation targeting, the process of changing policy interest rate will be such that it will lead to achieving macroeconomic goals.