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IHS Global Insight
January 26, 2015
Central Bank of Armenia raises interest rates in extra meeting in bid
to curtail inflation expectations
by Venla Sipila
The monetary policy committee of the Central Bank of Armenia CBA) on
22 January 2015 called an unscheduled policy meeting, in which it
decided to increase its key refinancing rate by 100 basis points, from
8.5% to 9.5%. The previous rate revision had been an increase from
6.75% to 8.5% in December. The deposit rate was also increased from 7%
to 8%, whereas the Lombard repurchasing rate was lowered from 20% to
17%. These additional rate moves follow the policy direction taken in
December (seeArmenia: 29 December 2014:Central Bank of Armenia raises
interest rate as rapid dram depreciation lifts inflation
expectations). The next scheduled meeting of the monetary policy
committee will take place on 10 February. According to ARKA News, this
will be followed by publication of a detailed monetary policy
programme for the first quarter of 2015. The latest inflation results
from the Armenian National Statistical Service had shown that consumer
prices in December increased by 4.6% year on year (y/y), following the
November gain of 2.6% y/y. Prices jumped by 3.0% from November. The
average consumer price inflation rate for 2014 measured 3.0%,
following 5.8% in 2013.
Significance:While inflation at present fits within the CBA's target
range, which is determined 2.5 percentage points on either side of the
central target of 4%, inflation expectations in the country are
elevated (seeArmenia: 14 January 2015:Armenian inflation accelerates
at end-2014, trend is likely to continue). This is mostly due to the
recent depreciation of the dram: over 2014, the AMD/USD exchange rate
weakened by 17%, while it slid by nearly 10% during December alone,
even as the central bank engaged in currency market interventions.
Weakening had continued in the first days of January, whereas
cumulative depreciation by 21 January since the turn of the year was
relatively modest, at 0.3%.The central bank hopes that the latest
interest rate moves will help in suppressing inflation expectations
and keeping inflation in target. The further rate rise is somewhat
surprising in its urgency, but not regarding the general policy
direction. Indeed, we believe that Armenian inflation is likely to
continue accelerating in at least in the near term, while it is not
unconceivable that inflation for 2015 as a whole will exceed the
target. Even as the low international oil prices and the overall
weakness of the economy have an opposite impact, we believe that the
depreciation of the dram will be the decisive factor determining near
term inflation developments. Given Armenia's dependence on Russia for
remittances and export markets, combined with the very weak outlook or
the Russian economy, weakening pressures on the dram are unlikely to
disappear yet.
January 26, 2015
Central Bank of Armenia raises interest rates in extra meeting in bid
to curtail inflation expectations
by Venla Sipila
The monetary policy committee of the Central Bank of Armenia CBA) on
22 January 2015 called an unscheduled policy meeting, in which it
decided to increase its key refinancing rate by 100 basis points, from
8.5% to 9.5%. The previous rate revision had been an increase from
6.75% to 8.5% in December. The deposit rate was also increased from 7%
to 8%, whereas the Lombard repurchasing rate was lowered from 20% to
17%. These additional rate moves follow the policy direction taken in
December (seeArmenia: 29 December 2014:Central Bank of Armenia raises
interest rate as rapid dram depreciation lifts inflation
expectations). The next scheduled meeting of the monetary policy
committee will take place on 10 February. According to ARKA News, this
will be followed by publication of a detailed monetary policy
programme for the first quarter of 2015. The latest inflation results
from the Armenian National Statistical Service had shown that consumer
prices in December increased by 4.6% year on year (y/y), following the
November gain of 2.6% y/y. Prices jumped by 3.0% from November. The
average consumer price inflation rate for 2014 measured 3.0%,
following 5.8% in 2013.
Significance:While inflation at present fits within the CBA's target
range, which is determined 2.5 percentage points on either side of the
central target of 4%, inflation expectations in the country are
elevated (seeArmenia: 14 January 2015:Armenian inflation accelerates
at end-2014, trend is likely to continue). This is mostly due to the
recent depreciation of the dram: over 2014, the AMD/USD exchange rate
weakened by 17%, while it slid by nearly 10% during December alone,
even as the central bank engaged in currency market interventions.
Weakening had continued in the first days of January, whereas
cumulative depreciation by 21 January since the turn of the year was
relatively modest, at 0.3%.The central bank hopes that the latest
interest rate moves will help in suppressing inflation expectations
and keeping inflation in target. The further rate rise is somewhat
surprising in its urgency, but not regarding the general policy
direction. Indeed, we believe that Armenian inflation is likely to
continue accelerating in at least in the near term, while it is not
unconceivable that inflation for 2015 as a whole will exceed the
target. Even as the low international oil prices and the overall
weakness of the economy have an opposite impact, we believe that the
depreciation of the dram will be the decisive factor determining near
term inflation developments. Given Armenia's dependence on Russia for
remittances and export markets, combined with the very weak outlook or
the Russian economy, weakening pressures on the dram are unlikely to
disappear yet.