CENTRAL BANK OF ARMENIA EXTENDS MONETARY LOOSENING CYCLE TO SEPTEMBER

World Markets Research Centre
Global Insight
September 9, 2009

BYLINE: Venla Sipila

The Central Bank of Armenia (CBA) yesterday cut its refinancing
interest rate by 25 basis points, taking the policy rate to 5.0%,
Reuters reports. The CBA Board took the decision in order to support
economic activity, while the move was facilitated by stabilising
trends in the financial markets. Weakened inflation pressures have
facilitated a prolonged monetary loosening cycle in Armenia this
year; the September cut already was the seventh policy interest
rate in 2009. The previous reduction was enacted only in August,
when the refinance rate was taken from 5.5% to 5.25% (seeArmenia:
12 August 2009: ).

Significance:Some further monetary loosening was expected, given the
weakness of inflation pressures in Armenia at the moment, together with
the collapsing economic activity. Indeed, consumer prices in August
continued to fall in monthly terms, while annual inflation in recent
months have remained comfortably below the CBA’s targeted rate of 4%
with 1.5 percentage points on either side (seeArmenia: 1 September
2009: ). Given the collapsing real economy, further interest rate
cuts may still follow in the coming months. However, the CBA needs
to balance its quest to support economic activity with the need to
secure price stability, and given the very wide external financing
needs of the economy in comparison to its foreign currency earnings,
the potential for even sharp further depreciation of the dram exchange
rate remains a risk. Any notable dram weakening would probably transfer
relatively rapidly to intensifying inflation pressures. Then again,
due to the undeveloped state of the financial sector, the role of
Armenian refinancing still remains mainly an indicator of the Central
Bank’s inflation expectations, rather than an effective policy tool
that would have a clear impact on market interest rates.