ARMENIAN INTEREST RATE CUT ON WANING INFLATION PRESSURES
by Venla Sipila

World Markets Research Centre
Global Insight
April 9, 2009

The Board of the Central Bank of Armenia (CBA) has decided to
cut its key policy rate, the annual refinancing rate, by 25 basis
points, bringing the rate to 7.5%, ARKA News reports. The modest
downward revision comes after the Board opted to leave the policy
rate unchanged in March. Prior to this, the refinancing rate was
increased by 100 basis points to 7.75%, in a move designed to
give support to the dram exchange rate on the switch to a flexible
exchange rate regime (seeArmenia: 4 March 2009:). The CBA based the
return to monetary easing on moderating inflation pressures, noting
that, due to falling demand both in global and domestic markets,
price growth at present is lower than forecast in spite of the recent
dram depreciation. Deteriorating external demand and easing financial
inflows have resulted in slowing down of the economy at an intensifying
rate. The latest inflation figures put consumer price growth in March
at 1.4% from February, which left the annual inflation rate stable
at 8.7% (seeArmenia: 2 April 2009:).

Significance:With economic growth now sharply cooling, Armenian
inflation pressures have recently displayed a decelerating
trend. Taking into account that this was not reversed even after
the March devaluation, the CBA’s looser monetary stance to boost the
ailing economy could be defended. Then again, March inflation data
in any case brought a halt to inflation deceleration. In addition,
financial risks at present are high in Armenia; the current-account
deficit remains wide, while the sharply deteriorated foreign exchange
inflows, combined with the country’s weak export earnings potential
and the weakness of global demand, imply a deep external financing
gap. Thus, downward pressure on the exchange rate may resurface again,
and caution in monetary easing should thus be exercised, paying close
attention to macroeconomic policy co-ordination. On the other hand,
Armenian interest rates do function as very effective policy tools,
instead mainly signalling the CBA’s inflation expectations.