Central Bank Of Armenia Presents Yet Another Modest Interest Rate Ri

CENTRAL BANK OF ARMENIA PRESENTS YET ANOTHER MODEST INTEREST RATE RISE
by Venla Sipila

World Markets Research Centre
Global Insight
August 5, 2008

The board of the Central Bank of Armenia (CBA) has decided to lift
its official refinancing rate to 7.50%, ARMNIFO News reports. This
move presents a 25 basis point increase in the policy rate, the
seventh such move in as many months. The decision closely follows
the publication of July inflation data, which showed month-on-month
(m/m) deflation of 2.2%, but also renewed speeding up of annual price
growth to 10.7% (see Armenia: 4 August 2008: ). The CBA analysed that
the recent easing of some food prices in international markets has
not filtered though to domestic inflation while high energy prices
continue to present second-round pressure on non-food and service
prices. The Bank further indicates that the behaviour of world market
oil prices continues to signal uncertainty, even though they have
fallen modestly in the very recent developments. The CBA adds that
further revisions in the policy rate will depend on the impact of
international food prices on the domestic market.

Significance: The further increase in the interest rate was expected,
given that the Armenian inflation rate keeps running well above the
CBA’s target rate of 4%. The CBA has in recent years proven fairly
competent in its monetary policy, showing ability and willingness to
remain vigilant regarding inflation control. The Armenian government
has also recently pledged wide-ranging efforts to curb rapid price
rises. However, the central bank’s key means for curbing inflation in
the still relatively undeveloped financial environment has been letting
the dram appreciate considerably in response to strong remittance and
foreign investment inflows. In addition to inflation being pushed
upwards from the cost side due to high prices of food and energy,
demand-side price pressures also continually play a role, as the robust
Armenian GDP growth has proved surprisingly reluctant to cool. As
domestic demand is partly boosted by high budget spending, including
fiscal restraint would be advisable as part of inflation-controlling
efforts, as also recently urged by the International Monetary Fund
(IMF; see Armenia: 23 June 2008:).