TEHRAN, Iran — Central banks play a key role in maintaining sustainable growth in equity markets through monetary policies. To this end, crucial strategies include adjusting the interbank interest rate in the context of a close watch on overall inflation trends.

In Iran, the inflation trend is definitively downward, with the rate evidently approaching the administration of President Hassan Rouhani’s single-digit target. This is indicated by recent Central Bank of Iran (CBI) figures that reveal that growth in the general level of prices for goods and services has dropped from 15.6% in the Iranian calendar year 1393 (March 21, 2014 - March 20, 2015) to just below 12% in 1394 (March 21, 2015 - March 19, 2016). As such, observers anticipate that the CBI will have no option but to compel banks to move to further cut interest rates. Indeed, only last month, banks were ordered to effectively slash deposit and business loan rates from 20% to 18% and 21% to 20%, respectively.

Given the lower interest rate environment, the notion of price-earnings (P/E) ratio is an indicator that is particularly worthy of attention. Of note, the P/E ratio is used to value a company by measuring its share price relative to its per share earnings. When credit facilities provided by banking and financial institutions tend to increase, stock market actors usually read it as a sign that they should anticipate higher share prices, as earning prospects for listed companies are strengthened. In Iran, the average P/E multiple expansion has historically fluctuated around 6 — far below that in other parts of the region. Indeed, according to the MSCI, the P/E ratio in Gulf Cooperation Council member states is about 13. Thus, it is prudent to assume that the multiple has room for growth in Iran — at least in the long run. That being said, investors are hoping that the desire of Iranian banks to issue more affordable loans will lead to increased momentum for economic growth, thereby ultimately resulting in more solid returns in the current Iranian year, which began March 20. In this vein, it should be noted that the Rouhani administration is aiming for 5% economic growth in 2016, while the World Bank's projection is 6.1%.

Other measures are also being taken to boost economic development. The Rouhani administration’s fiscal and budgetary policies, coupled with the CBI’s quantitative easing policies, are expected to enhance production and productivity while stimulating consumer spending and investment. The latter are in turn expected to be elevated by the lowering of borrowing and lending rates, in addition to reduced reserve requirements and discount rates for banks. Moreover, financing via the stock exchange is the only viable and cheap approach to ignite the engine of economic growth.