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Armenia cuts rate 25 bps on slow inflation progress

Tuesday, February 14, 2017 7:23
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    Armenia’s central bank lowered its benchmark refinancing rate by a further 25 basis points to 6.0 percent as progress in reaching its inflation target will be slower than expected due to a cut to electricity tariffs, lower prices of some non-food products and natural gas, and a more restrictive fiscal policy by the government this year as compared with last year.
    The Central Bank of Armenia (CBA) cut its rate by 250 basis points last year, most recently in December, and has cut the rate by 450 points since embarking on an easing cycle in August 2015.
    The CBA said it believed its past rate cuts have created conditions for inflation to hit its target and neutralize the deflationary environment and reiterated its recent reminder that future changes to traditional monetary policy “remain limited.”
     Armenia’s inflation rate improved to minus 0.6 percent in January from minus 1.1 percent in December but the central bank said it didn’t expect any significant external inflationary effects in coming months although there are some signs of inflation in international commodity markets.
     The central bank targets inflation of 4.0 percent, plus/minus 1.5 percentage points.
     Domestic demand in Armenia is slowly recovering due to easy monetary and fiscal policies in recent years but estimates for growth in 2016 have been lowered, the bank said.
     Last month the CBA estimated 2016 growth of 0.8 to 1.2 percent, down from previous forecasts of 1.2 to 1.7 percent, due to a decline in agriculture, construction and private investment.
     Armenia’s government had projected 2.2 percent growth for 2016 in its 2016 budget and 3.2 percent growth in 2017. In the second quarter of last year, Armenia’s economy shrank by an annual rate of 2.6 percent following growth of 1.6 percent in the first quarter.
     The exchange rate of Armenia’s dram plunged in late November 2014 in response to the economic crises in Russia, Armenia’s largest trading partner, and the fall in the ruble.
    In response, the CBA quickly raised its rate by 375 basis points to 10.50 percent from December 2014 to February 2015, helping stabilize the dram’s exchange rate.
    Since September last year the dram has been depreciating slowly though it has been more stable this year. The dram was trading at 486.8 to the U.S. dollar today, down 0.6 percent this year.


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