Armenia's central bank cut its benchmark refinancing rate by a 25 basis points to 8.50 percent and expects to ease its policy further as inflationary expectations remain high while the trend toward lower inflation is expected to continue in coming months.
The Central Bank of Armenia (CBA), which has now cut its rate by 200 basis points since embarking on an easing cycle in August 2015, said on Feb. 16 that the low level of inflation is almost entirely due to the fall in commodity prices and the deflationary impact from the foreign sector on domestic prices, and its board estimates that this trend will continue.
In December 2015, when the CBA cut its rate by 100 basis points, the central bank said it believed that it had now largely overcome the inflationary risks from the last year and expected to ease its policy further in the absence of any external or internal risks.
Armenia's headline inflation rate dropped to minus 0.4 percent in January from minus 0.1 percent in December while the depreciation of the dram currency continued.
Following a plunge in the dram's exchange rate in November and December 2014 in response to the drop in Russia's ruble - Armenia's largest trading partner - the central bank raised rates three times by a total of 375 basis points from December 2014 to February 2015.
This helped stabilize the dram and it only depreciated by 1.8 percent against the U.S. dollar in 2015 compared with its 14.7 percent fall in 2014.
This year it has continued to ease and was trading at 496.1 to the dollar today, down 2.1 percent since the beginning of the year, with local press reporting on Feb. 5 that the central bank had spent US$29 million in intervening in the domestic currency market to support the dram's exchange rate.
Armenia's economy is estimated to have expanded 3.2 percent in 2015, helped by agriculture and mining, but the CBA said domestic demand remains weak despite "years of government and central bank stimulus policies."