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Central Bank Of Armenia Raises Interest Rate Again On Persistent Inf

CENTRAL BANK OF ARMENIA RAISES INTEREST RATE AGAIN ON PERSISTENT INFLATION CONCERNS
by Venla Sipila

World Markets Research Center
Global Insight
March 10, 2010

The Central Bank of Armenia (CBA) yesterday lifted its refinancing
interest rate to 6.5%, up by 50 basis points. The move was the third
similar increase in as many months this year. According to Reuters,
the CBA took the decision seeing rising signs of the economy picking
up, in order to bring inflation rates down towards the targeted level.

The latest inflation figures put consumer price growth in February
to 9.4% year-on-year (y/y), placing it far above the CBA’s targeted
rate of 4% with 1.5 percentage points on either side (seeArmenia:
3 March 2010: ).

Significance:Given the continued pick-up in inflation, we expected
further interest rate increases. The Armenian economy is indeed
expected to start recovering from its very severe recession. However,
as this revival is starting from a very weak position, no strong
demand pressures on prices are likely to emerge soon. On the other
hand, cost-side pressures on prices are expected to persist in the
coming months. Thus, further interest rate increases may follow. On
the other hand, given the still undeveloped structures of the
Armenian financial sector, the CBA’s refinancing rate does not yet
fully function as a policy tool, but rather gives an indication of
the central bank’s inflation expectations. Encouragingly, the CBA
has previously indicated that it is going to retain its flexible
exchange-rate policy. This will help in managing the still very high
financial risks, related to Armenia’s deep external imbalances, and
also in controlling inflation in the future when foreign currency
inflows are expected to recover again.

Chalian Meline:
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