World Markets Research Centre
Global Insight
March 11, 2009

Central Bank of Armenia Leaves Interest Rate Stable in March

BYLINE: Venla Sipila

The Board of the Central Bank of Armenia (CBA) yesterday opted to keep
the policy interest rate unchanged at 7.75%, Reuters reports. This
decision follows an increase in the interest rate by 100 basis points
earlier this month, enacted to support the exchange rate in the switch
to a flexible regime (seeArmenia: 4 March 2009:). This had been a
departure from the CBA’s previous monetary policy, which had included
several interest rate cuts in recent months, the latest to support
flagging growth in the economy which is now being hit by secondary
effects of the international financial and economic crisis, as foreign
investment and remittance inflows are deteriorating (seeArmenia: 11
February 2009: ). The CBA stated that the current level of the
refinancing rate presented a suitable balance between the need to
control inflation and the task of supporting economic growth.

Significance:With the international crisis having worsened, Armenia’s
economic outlook and financial circumstances are doing the same. With
the dram floating, interest rates are unlikely to be reduced until the
external value of the dram has remained stable for some time, without
central bank intervention. So far, the revision in the exchange rate
regime seems to have been successful, and the recently approved loan
from the International Monetary Fund (IMF) gives Armenia crucially
important reserve support, while naturally adding to the credibility
of the current exchange rate policy and other macroeconomic policies
(seeArmenia: 9 March 2009:). Adding to macroeconomic stability is the
recent clear moderation in inflation pressures (seeArmenia: 3 March
2009:). However, with growth sharply cooling, external imbalances
still wide, and the international economic and financial environment
volatile, further depreciation pressure on the dram cannot be ruled
out, and this would quickly be reflected in rising inflation. In this
case, the CBA would be likely to try to control these influences by
interest rate rises.

From: Emil Lazarian | Ararat NewsPress