CENTRAL BANK OF ARMENIA LIFTS INTEREST RATE FURTHER AS INFLATION ACCELERATES
by Venla Sipila
World Markets Research Center
Global Insight
April 7, 2008
The Board of the Central Bank of Armenia (CBA) in their 2 April meeting
decided to lift the CBA’s annual refinancing rate by a further 25
basis points, ARKA News reports. This move takes the main policy rate
to 6.5%. The interest rate was increased by a similar magnitude in
March as well as February, having been left unchanged in January. The
Board indicated that high and accelerating inflation in international
food markets over the first quarter of the year has been reflected
in Armenian food prices, further leading to rising cost of non-food
goods and services.
Indeed, ARKA News further reports that consumer prices in Armenia in
March increased by 1.4% month-on-month (m/m), leading to the annual
inflation rate shooting up to 9.6%. The corresponding rates in February
registered 1.1% m/m and 7.5% year-on-year (y/y). Compared with the
end of 2007, Armenian consumer prices increased by 4.8% by the end of
March, further data from the National Statistical Service show. The
CBA board pledges gradual further tightening of monetary and credit
policy in order to contain near term inflationary pressures, to allay
inflation expectations and to counteract the secondary effects that
risk arising from the external inflation forces. Armenian consumer
price inflation ended year 2007 at 6.6%, averaging 4.4% for 2007
(see Armenia: 2 January 2008: ).
Significance:The CBA’s inflation-targeting policy has proved relatively
successful over recent years, even if implying strong appreciation of
the dram exchange rate, in conditions of strong foreign remittance
and FDI inflows. However, over March, the exchange rate of the dram
against the U.S. dollar was reported to have remained virtually stable,
while the first quarter of the year witnessed weakening of the dram. In
addition to Armenian inflation being pushed upwards from the cost side
due to high prices of food, also demand side price pressures persist,
as the robust GDP growth has proved somewhat more reluctant to cool
than we previously expected. Domestic demand is partly boosted by
fiscal spending.
Adding these recent overheating signs to the effect of persistently
high food and energy prices, inflation pressure in Armenia is likely
to remain considerable in the near term, making achieving the target
specified by the CBA at 4% (with 1.5% on either side) a challenging
task.