CBA BOARD CONSIDERS IT EXPEDIENT TO REDUCE GRADUALLY INTEREST RATES

Noyan Tapan

Jan 21, 2009

YEREVAN, JANUARY 21, NOYAN TAPAN. At the January 13 sitting,
the Board of the Central Bank of Armenia (CBA) made a decision to
reduce the CBA refinancing rate by 0.25% to 7%. The interest rates
of attracted deposits and lombard credits were established at 4%
and 10% respectively.

The decision was made based on the situation report, which assessed,
by using new information, the forecasts about the current situation,
the risks and the new macroeconomic forecasts as well the possible
risks related to these forecasts. The situation report also contained
new results received by using the CBA quarterly forecast model,
and these results continue bearing evidence of the tendencies to a
deepening deflation environment.

The CBA PR Service reported that only 0.1% inflation was recorded in
December on November 2008, as a result of which the 12-month inflation
fell by 1.4 percentage points and made 5.2%, ensuring the target level
of inflation. The fall in inflation rates was mainly conditioned by
the continuous fall of prices in international markets of goods and
raw materials because of the global recession and became apparent
in domestic markets of these goods as well. Following the fall in
November, a 15% fall in diesel fuel prices and a 3.5% fall in gasoline
prices was recorded in Armenia in December. On the whole, the inflation
recorded based on the results of the year was due to a growth in prices
of food commodities (including alcoholic drinks and cigarettes) – 3.3%,
nonfood commodities – 0.2% and a growth in tariffs of services – 11.4%.

The members of the CBA Board agreed that the external inflation
pressures continued to weaken due to the tendencies to a decline
in global economic growth rates and became apparent in the domestic
markets of food and nonfood commodities, resulting in a considerable
fall in overall inflation rates. In the opinion of the CBA Board,
although the uncertainty of foreign and domestic economic developments
has increased, the clarifications to the forecasts on economic growth
in foreign countries, especially Armenia’s trade partners, show that
the external deflation environment continues to remain. Under these
conditions it is expected that in mid 2009 inflation will form in
the lower part of the target interval.

The CBA Board discussed the risks concerning a fall or growth of
forecast inflation. As a result, the risks towards a decline were
considered as prevailing in the overall balance of risks.

The Board also discussed in detail the possible impact of consequences
of the global economic crisis on domestic economic developments in
2009. It was mentioned that the prospects of external demand continue
to become worse, which will have its impact, especially on the export
sector of domestic economy, leading to further decline in production
volumes in the exporting branches. The impact of the global economic
crisis will also be seen in construction because of declining inflow
of financial resources from abroad and the delay in financing of
some investment programs. The slowing rates of inflow in the form
of noncommercial transfers will be conditioned by Russian economy’s
capacities to overcome the consequences of the economic crisis. At
the same time, it was mentioned that the forecast domestic economic
developments will depend very much on the scale and directions of the
additional economic programs that the government plans to implement.

Underlining the importance of the situation that has formed in
conditions of the global financial and economic crisis, the members
of the CBA Board focused on two possible scenarios of mitigating
the monetary and credit conditions: 0.25% and 0.5% reduction of the
refinancing rate. In this connection the Board has repeatedly stressed
the necessity of conduting such a monetary and credit policy that will
allow to combine efficiently the tasks of ensuring price stability and
financial stability. There were arguments that the current interest
rates continue being attractive for capital inflow. At the same time,
a sharp reduction of interest rates at this moment is likely not
to have desirable consequences for interest rates of the interbank
market, therefore for the monetary and credit transfer chain. The Board
attached great importance to an increase of credits for implementation
of measures and to improvement of credit accessibility. On the other
hand the continuous fall in inflation rates and the existence of
risks towards a fall was put forward as the main argument for sharper
reduction in interest rates. As a result, the CBA Board considered the
version of gradully reducing the interest rates as most well-founded.