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CENTRAL BANK OF ARMENIA RAISES INTEREST RATE
by Venla Sipila
Global Insight
February 12, 2008
The Board of the Central Bank of Armenia (CBA) has decided to increase
the annual refinancing rate by 25 basis points, ARKA reports. This
move takes the key policy rate up to 6%, and follows a hike of similar
magnitude in December, while the rate was left unchanged in January
(see Armenia: 6 December 2007: and 9 January 2008: ).The board of
the CBA remained concerned over both external and domestic inflation
sources. The CBA attributed the continued strength of domestic demand
to expansive fiscal policy. They further maintained that as external
inflation pressure is likely to persist over this year, lowering
inflation expectations and keeping the inflation rates within the
target range are likely to call for further tightening of monetary
policy.
Significance:The CBA's inflation-targeting policy has proved
relatively successful, but necessitating strong appreciation of the
dram exchange rate, in conditions of strong foreign remittance and
FDI inflows. Latest data show that inflation remained at an elevated
level in January, boosted notably by high food prices (see Armenia:
6 February 2008: ). Some moderation in Armenian inflation is likely in
the near term as growth should finally moderate from the double-digit
rates. However, some demand-side inflation pressures will remain as
domestic demand is likely to still remain robust, even if finally
easing. Moreover, oil prices are also likely to remain at very high
rates for some time to come, providing a constant source of inflation
pressure from the cost-side. In addition, the cost of food still
has a very large bearing on Armenian inflation, and development of
grain prices will also be of considerable importance for Armenia's
inflation this year. We believe that the central bank will continue
to be vigilant, stepping in with further rate rises if needed.
by Venla Sipila
Global Insight
February 12, 2008
The Board of the Central Bank of Armenia (CBA) has decided to increase
the annual refinancing rate by 25 basis points, ARKA reports. This
move takes the key policy rate up to 6%, and follows a hike of similar
magnitude in December, while the rate was left unchanged in January
(see Armenia: 6 December 2007: and 9 January 2008: ).The board of
the CBA remained concerned over both external and domestic inflation
sources. The CBA attributed the continued strength of domestic demand
to expansive fiscal policy. They further maintained that as external
inflation pressure is likely to persist over this year, lowering
inflation expectations and keeping the inflation rates within the
target range are likely to call for further tightening of monetary
policy.
Significance:The CBA's inflation-targeting policy has proved
relatively successful, but necessitating strong appreciation of the
dram exchange rate, in conditions of strong foreign remittance and
FDI inflows. Latest data show that inflation remained at an elevated
level in January, boosted notably by high food prices (see Armenia:
6 February 2008: ). Some moderation in Armenian inflation is likely in
the near term as growth should finally moderate from the double-digit
rates. However, some demand-side inflation pressures will remain as
domestic demand is likely to still remain robust, even if finally
easing. Moreover, oil prices are also likely to remain at very high
rates for some time to come, providing a constant source of inflation
pressure from the cost-side. In addition, the cost of food still
has a very large bearing on Armenian inflation, and development of
grain prices will also be of considerable importance for Armenia's
inflation this year. We believe that the central bank will continue
to be vigilant, stepping in with further rate rises if needed.