CENTRAL BANK OF ARMENIA KEEPS INTEREST RATES STABLE IN NOVEMBER
World Market Research Centre
Global Insight
November 11, 2009
The Central Bank of Armenia (CBA) in its meeting yesterday decided
to keep its refinancing interest rate unchanged at 5%, Reuters reports.
The CBA had taken a similar decision also last month, while September
had seen it cut the rate by 25 basis points, in the seventh monthly
easing in a row (seeArmenia: 9 October 2009:). While announcing its
decision, the CBA expressed its confidence on Armenia’s ability to meet
the inflation target this year. The CBA’s monetary policy programme
specifies the planed end-year consumer price inflation at 4% plus/minus
1.5 percentage points. The central bank added that the current level
of interest rates was low enough to provide for support for economic
recovery. The latest inflation data put annual consumer price growth
in October at 3.5%, in some moderation from the September rate of 3.7%
(seeArmenia: 3 November 2009:).
Significance:Given the extremely severe economic contraction that has
gripped Armenia this year as foreign currency inflows have dried up,
demand-side inflation pressures remain very muted. On the other hand,
the same does not hold true for cost-side inflation. Indeed, strong
upward pressure on annual service price inflation has resulted from
the increase of Russian gas prices enacted earlier this year.
Moreover, imported inflation risks are posed by the vulnerability
of the dram exchange rate to the shock of the sharp reduction in
investment and remittance inflows, and the resultant wide external
financing gap. Indeed, ARKA News reports that the CBA again had to
defend the external value of the dram with foreign currency sales,
as the relative exchange rate stability that had resulted from the
CBA’s imposed limits on commercial banks’ hard currency holdings proved
only temporary, prompting even expectations that the CBA may have to
require commercial banks to sell their foreign currency reserves.
Thus, the CBA may soon again face the trade-off between supporting
growth on the one hand, and seeking to control inflation and
buttressing the dram on the other. Then again, due to the undeveloped
state of the financial sector, the role of Armenian refinancing
still remains mainly an indicator of the Central Bank’s inflation
expectations, rather than an effective policy tool that would have
a clear impact on market interest rates.