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Central Bank Of Armenia Presents Yet Another Modest Interest Rate Ri

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  • 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:).
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