Central Bank Of Armenia Increases Interest Rate As Inflation Acceler

Venla Sipila

Global Insight
November 5, 2007

The board of the Central Bank of Armenia (CBA) decided to lift its
refinancing rate by 25 basis points to 5.25%, ARKA News reports. The
hike in the key policy rate follows an upward move of a similar
magnitude in October. Prior to this, the rate was left stable in
September and August after the CBA had taken the rate from 4.50%
to 4.75% in July.

The policy rate was last cut in April. The CBA made the monetary
tightening move in a bid to control inflationary pressure. The latest
data from the Armenian National Statistical Service show that consumer
prices increased by 5.7% year-on-year (y/y) in October, with the rate
accelerating considerably compared to the September and August rates
of 2.7% y/y and 1.6% y/y in August. The considerable strengthening
of inflation pressure was mainly brought about by food prices, which
surged by 9.2% y/y. Non-food prices decreased by 1% and service prices
increased by 3.2% y/y. Measured month-on-month (m/m), consumer prices
leapt by 3.1%, after advancing by 0.7% in September.

This development was driven by a surge of 5.6% in the price of food.

The cumulative growth of consumer prices over the first ten months
of the year came in at 3.0%, while the y/y growth of prices over the
January-October period amounted to 3.9%.

Significance:The board of the CBA has expressed concern over both
external and domestic sources of higher inflation, with the world
market prices for commodities presenting cost pressure on prices.

Indeed, in addition to energy prices, the world market price for,
for example, grain, is clearly reflected in inflation rates, due to
the strong bearing of food costs on Armenian inflation. Moreover,
prices are also being pushed upwards from the demand side, and the
CBA expects near-term inflationary pressure due to the strength of
domestic consumption and investment spending, as well as high budget
expenditures. This year’s state budget targets end-2007 inflation at
4%, with a band of 1.5 percentage point on either side. Global Insight
believes that the central bank’s 2007 inflation target at present
may still be within reach, even if risks threatening this target have
recently increased. The CBA is implementing inflation-targeting policy,
which has proved successful, even if implying the strong appreciation
of the dram exchange rate, in conditions of strong foreign remittance
and FDI inflows.

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