CENTRAL BANK OF ARMENIA LEAVES INTEREST RATE STABLE AS ACCELERATING INFLATION REMAINS BELOW TARGET
Global Insight
April 3, 2013
by Venla Sipila
The Board of the Central Bank of Armenia (CBA) in its 26 March meeting
decided to leave the key policy interest rate unchanged at 8%, where
it has remained since late 2011. The latest inflation data from the
Armenian National Statistics Service show that consumer prices in
March rose by 3.4% year-on-year (y/y), following a gain of 3.1% y/y
in February and 2.6% y/y in January. Meanwhile, in month-on-month
(m/m) terms, prices last month grew by 0.4%, after retreating by
the same relative rate in February. Among the main price categories,
non-food goods saw the highest gain, with an average inflation rate
of 5.5% y/y. Food prices climbed by 3.2% y/y, while service tariffs
rose by 2.3% y/y. The average annual inflation rate for the first
quarter of the year came in at 3.0% y/y, while the cumulative price
gain since the beginning of the year made 2.9%. Notwithstanding the
acceleration, Armenia’s inflation rate still clearly remains below
the CBA’s central target rate of 4%, although the variation range of
+/1.5% implies that it has reached the lower bound of the band.
When announcing its latest interest rate decision, the CBA board
noted that no marked external inflationary pressures are likely in
the coming months, while also domestic demand-side impacts on prices
should remain moderate. Overall economic growth has recently proved
stronger than expected, but fiscal policy has been more restrictive
than was projected when the CBA’s monetary policy was outlined. Fiscal
restraint counteracts the boosting impact on private spending related
to the surprisingly strong overall growth in the industrial and
service sectors. Consequently, the Board expects annual inflation
to reach the central target of 4% in the second quarter of 2013,
then remaining fairly stable in the coming quarters.
Significance:Even as the latest interest rate decision was taken
shortly before the March inflation results were published, we believe
that the CBA’s inflation outlook is fairly plausible. Indeed, its
projections well match with our outlook; our current projection
for Armenia’s average inflation rate in 2013 stands at 4.4%. Thus,
we believe that the CBA will retain its refinancing rate unchanged in
the near term as well. A key risk to the inflation outlook is posed by
the development of food prices; if harvests prove disappointing, the
inflationary push from this source could be potentially significantly
stronger than currently foreseen.