CBA FORECASTS 5.4% INFLATION FOR 2008

YEREVAN, JANUARY 15, NOYAN TAPAN. According to forecasts of the Central
Bank of Armenia (CBA), by the version of the unchanged level of
interest rates, inflation will make 5.4% in Armenia in the 12-month
period following December 2007 and 6.3% in the second quarter of 2008.
The base scenario of inflation until the end of the second quarter 2008
includes the version that a growth in prices of bread products, butter
and vegetable oil will contribute to the growth of the cumulative
consumer price index by 3.8%, while the growth of gas prices due to the
supposed end of budgetary subsidizing will contribute to the growth of
this index by 1.2%. These forecasts were announced at the December 29
sitting of the CBA Board.

According to the CBA press service, by CBA’s forecasts, the formation
of higher international oil and food prices (including grain prices)
than is expected may contribute to higher actual inflation than the
forecast index, while the increase of oil prices will depend on both
geopolitical and external economic developments. Besides, it may be
also contributed by a higher than forecast growth of the consumption
component in the overall demand and further positive deviation from the
balanced level of consumption, as well as by higher than expected
growth rates of crediting of the economy.

The registration of a lower actual inflation index than is forecast may
be contributed by an increase in foreign currency amounts of exports
(as a result of higher than forecast prices of base metals), as well as
by a fall in prices of imported goods under conditions of greater
capital inflow, as a result of appreciation of the dram.

At the same time, developments in the agricultural sector which mainly
depend on climatic conditions may involve risks of both a fall and rise
in prices.

Taking into account the developments in the fourth quarter of 2007 and
the CBA’s forecasts for the further 12-month period, the CBA Board
registered that despite some stabilization of oil and food prices, the
inflation pressures from the external environment remained at the end
of the fourth quarter of 2007 and will remain in the forecast period.
In case of absence of unexpected shocks in the external environment,
these pressures will be milder than in the past period. The CBA Board
also stated that the impact of the internal environment created smaller
inflation pressures than was forecast – in the fourth quarter of 2007,
while it is possible that combined with most expanding tax and
budgetary policy, the high growth rates of private consumption will
increase inflation pressures to some extent in the forecast period. In
these conditions the CBA Board still sees risks in ensuring the 2008
target inflation index.

At the same time the CBA Board discussed the seasonal manifestations,
which are typical of Armenia’s economy and financial sector and are
most pronounced at the beginning of a year, particularly a sharp
decline in demand for money in January, due to which a rise in interest
rates cannot have the desired effect on interest rates in the interbank
market. It was underlined that the consistent tightening of the
conditions of the monetary and credit policy by the CBA in recent
months allows to refrain from raising the interest rates at the given
moment.

Under conditions of various opinions about reduction of inflation
pressures from the external environment, the deviation of inflation
from the central position of the target interval, and the possible
scenarios of further changes in interest rates, the CBA Board discussed
the options of either raising the CBA refinancing interest rate or
leaving it unchanged.

As a result, at the December 29 sitting the CBA Board made a decision
to leave the CBA refinancing interest rate unchanged – 5.75%. The pawn
credit and deposit interest rates were fixed at 8.75% and 2.75%
respectively.

At the same time the CBA Board expressed a willingness to be consistent
in the issue of correcting the interest rates if inflation pressures
from the internal and external environments do not decline.