CENTRAL BANK OF ARMENIA PRESENTS ANOTHER INTEREST RATE RISE

World Markets Research Centre
Global Insight
March 14 2010

The Central Bank of Armenia (CBA) yesterday announced a 50-basis-point
increase in its refinancing interest rate, Reuters reports. This is
already the fourth increase of the year, and takes the policy rate to
7.0%. The central bank remains concerned about rapid inflation; the
latest consumer price data put annual price growth in March to 8.8%,
far above even the upper limit of the CBA’s inflation target band of
4.0% +/-1.5 percentage points (seeArmenia: 2 April 2010:). The bank
also indicated that further interest rate rises are on the cards.

Indeed, it expects inflation pressures to persist, and thus intends
to hold on to gradual monetary tightening.

Significance:Given the persistently rapid inflation, the further
interest rate rise was expected. However, the CBA’s efforts to guide
inflation back down towards the target range by refinancing interest
rate rises are bound not to be very effective. This is because the
policy rate does not yet have a significant impact on market rates
or money supply, and thus, it mainly functions as an indicator or the
central bank’s inflation expectations. Inflation is indeed likely to
remain high in the near term, partly because retail prices for natural
gas were increased from the beginning of April, following a rise in
the Russian import price. Exchange rate developments continue to play
a major part as Armenia’s inflation determinant, with depreciation
feeding into domestic prices via import costs. However, maintaining
a flexible exchange rate policy remains a key means for Armenia to
manage its external financial pressures. Moreover, looking forward,
a flexible exchange rate will also help in inflation control, when,
eventually, foreign currency inflows are likely to recover.