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Central Bank Of Armenia Leaves Interest Rate Stable As Accelerating

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  • Central Bank Of Armenia Leaves Interest Rate Stable As Accelerating

    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.

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