Armenia's central bank cut its benchmark refinancing rate by 25 basis points to 10.25 percent, its first move to roll back rate three rate hikes since December, saying it expects inflation to continue to fall in the second half of the year and deviate from the lower limit of its target range.
The Central Bank of Armenia (CBA) raised its key rate by 375 basis points from December through February in response to a sharp devaluation of the dram's exchange rate in November and December 2014 due to the impact on its economy from Russia's economic crises.
But this year the dram has stabilized and was trading at 478.6 to the U.S. dollar today, down only 0.8 percent since the beginning of this year but down 14 percent since November 1, 2014.
The inflation rate has also started to decelerate, hitting 4.2 percent in July, down from 5.5 percent in June and a 2015-high of 7.75 percent in April.
The central bank, which targets inflation of 4.0 percent, plus/minus 1.5 percentage points, said its policy decision was based on the third quarter inflation report that will be released on Aug. 21.
In June the CBA said it expected inflation to stabilize around its target next year.
The CBA said the impact of external developments on Armenia's economy were not seen as inflationary due to slower-than-expected global growth that is resulting in a deflationary environment for international commodities.
Armenia's economic activity exceeded expectations in the second quarter, the CBA said, adding that growth rose by 4.2 percent in January-June from the same period last year, with agriculture and industry registering high growth.
However, despite the high rates of growth of agricultural products, and an expected continuation of this trend, commodity prices will be lower this year than last year.
In May the central bank revised upwards its forecast for economic growth in 2015 to 1.6 - 2.6 percent from its earlier forecast of 0.4 - 2.0 percent. In 2014 Armenia's GDP grew by 3.4 percent.
Armenia's Gross Domestic Product expanded by an annual rate of 2.2 percent in the first quarter compared with a rate of 2.6 percent in the fourth quarter of 2014.