CENTRAL BANK OF ARMENIA INCREASES REFINANCING RATE

Global Insight
October 8, 2007

The Board of the Central Bank of Armenia (CBA) decided to lift the
annual refinancing interest rate by 25 basis points in October. This
move takes the key policy rate to 5%, and follows decisions to leave
the rate stable in September and August after the CBA had taken the
rate from 4.50% to 4.75% in July. Prior to this, the rate had been cut
in April. ARKA reports that the CBA added it does not rule out further
interest rate revisions in the future, if warranted by the need to keep
inflation within the target band or to control inflation expectations.

Significance:The upward revision comes as Armenian prices are under
upwards pressure from both cost and demand sides. High energy import
prices are combined with increased pressure on cost of food, partly
because of high world market prices for grains. In addition, demand
is boosted as persistently strong GDP growth has kept income growth
rapid, while foreign remittance and foreign direct investment inflows
remain strong. Latest inflation data show that Armenian consumer
prices increased by 3.8% over the first three quarters of the year
(see3 October 2007:). This year’s state budget targets end-2007
inflation at 4%, with a band of 1.5 percentage points on either side.

This goal still seems within reach, even though it is important that
the CBA follows the latest decision with still more interest rate hikes
should inflation pressure increase. The CBA has shown determination
in implementing its inflation targeting policy.

However, this has necessitated considerable dram appreciation, as
strong workers’ remittance and investment inflows have supported the
supply of foreign currency, implying strengthening pressure on the
exchange rate.

From: Emil Lazarian | Ararat NewsPress