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World Markets Research Centre
Global Insight
June 11, 2009
Central Bank of Armenia Drives Interest Rate Lower to Spur Growth
BYLINE: Venla Sipila
The Central Bank of Armenia (CBA) has continued its monetary
loosening; according to ARKA News, the Board of the central bank
decided to take the policy interest rate to 6.25%, down by 100 basis
points. This is more aggressive than presenting a continuation of the
recent monetary policy stance, and the more modest cuts enacted by the
CBA recently. Indeed, 25-basis-point cuts were enacted in both May and
April (seeArmenia: 13 May 2009:). Before this, the refinancing rate
had been increased by 100 basis points in February, to support a move
to a more flexible exchange-rate regime. The CBA Board based the
decision on the need to support economic growth, indicating that
further easing of monetary conditions was facilitated by the current
inflation developments, which generally confirm the Banks'
projections. The latest inflation data from May show consumer prices
rising by a moderating month-on-month (m/m) rate of 1.6%. Meanwhile,
annual inflation accelerated, however it still remained well within
the CBA's targeted range of 4% +/-1.5 percentage points (seeArmenia: 2
June 2009:). The CBA Board expects inflation to remain within the
target range in the coming months. Thus, still further interest rate
cuts may be likely, given the current need to support Armenian
economic activity with any possible means.
Significance:The CBA takes its current policy decisions in an
environment where growth is sharply cooling, at the same time as
annual inflation is seeing renewed acceleration. Thus, the demands for
monetary policy risk becoming contradictory, as the bank needs to
balance the need to provide support for the real sector at the same
time as securing price stability. Moreover, the potential of even
sharp renewed upward price pressures certainly exists, given the
vulnerability of the dram exchange rate amid Armenia's high external
financing requirements, and caution in further monetary loosening
would thus be advisable. Then again, Armenian interest rates do not
yet function as very effective policy tools, as the pass-through of
policy rates to markets rates is still relatively weak, and thus the
main function of rate revisions is to reflect official inflation
expectations.
Global Insight
June 11, 2009
Central Bank of Armenia Drives Interest Rate Lower to Spur Growth
BYLINE: Venla Sipila
The Central Bank of Armenia (CBA) has continued its monetary
loosening; according to ARKA News, the Board of the central bank
decided to take the policy interest rate to 6.25%, down by 100 basis
points. This is more aggressive than presenting a continuation of the
recent monetary policy stance, and the more modest cuts enacted by the
CBA recently. Indeed, 25-basis-point cuts were enacted in both May and
April (seeArmenia: 13 May 2009:). Before this, the refinancing rate
had been increased by 100 basis points in February, to support a move
to a more flexible exchange-rate regime. The CBA Board based the
decision on the need to support economic growth, indicating that
further easing of monetary conditions was facilitated by the current
inflation developments, which generally confirm the Banks'
projections. The latest inflation data from May show consumer prices
rising by a moderating month-on-month (m/m) rate of 1.6%. Meanwhile,
annual inflation accelerated, however it still remained well within
the CBA's targeted range of 4% +/-1.5 percentage points (seeArmenia: 2
June 2009:). The CBA Board expects inflation to remain within the
target range in the coming months. Thus, still further interest rate
cuts may be likely, given the current need to support Armenian
economic activity with any possible means.
Significance:The CBA takes its current policy decisions in an
environment where growth is sharply cooling, at the same time as
annual inflation is seeing renewed acceleration. Thus, the demands for
monetary policy risk becoming contradictory, as the bank needs to
balance the need to provide support for the real sector at the same
time as securing price stability. Moreover, the potential of even
sharp renewed upward price pressures certainly exists, given the
vulnerability of the dram exchange rate amid Armenia's high external
financing requirements, and caution in further monetary loosening
would thus be advisable. Then again, Armenian interest rates do not
yet function as very effective policy tools, as the pass-through of
policy rates to markets rates is still relatively weak, and thus the
main function of rate revisions is to reflect official inflation
expectations.