Armenia's central bank left its refinancing rate unchanged at 5.75 percent, confirming it expects to maintain stimulative monetary conditions for a long time to achieve its inflation target as inflation is expected to remain below the target in coming months due to the overall macroeconomic conditions.
The Central Bank of Armenia (CBA) lowered its rate by 25 basis points in January in the first cut since February 2017 and at that time said it expected to maintain easy conditions for a long time. CBA reiterated this guidance in its previous policy decision in March.
Armenia's headline inflation rate was stable at 1.9 percent in February and March, below its target of 4.0 percent, plus/minus 1.5 percentage points.
Weakening global demand and persistent low inflationary environment is leading to more lenient monetary conditions by central banks in major economies so the CBA board said it is not expecting any inflationary pressures from the external sector in coming months.
Economic activity in Armenia in the first three months of the year was, as expected, high, with growth of 6.5 percent, supported mainly by private consumption, CBA said.
At the same time, fiscal policy acted more than a constraint on activity than expected with the deficit significantly less than forecast.
But during the year fiscal policy is expected to have a neutral impact on inflation as its contractionary effect on demand should be reversed, the bank added.
CBA said the main downside risks stem from weak private demand and tighter fiscal policy.
Armenia's dram currency has appreciated since early March and was trading at 481.5 to the U.S. dollar today, up 0.5 percent this year.
In February Armenia and International Monetary Fund (IMF) staff agreed on a 3-year precautionary, $250 million, stand-by arrangement that will be considered by the IMF board in May.
The agreement aims to support the government's reforms and strengthen the country's resilience against external shocks.
In its statement from Feb. 26, the IMF said Armenia's economy has been robust but growth moderated to more sustainable levels last year due to a slowdown in its trading partners.
This year growth is expected to ease to about 4.5 percent due to a weaker global environment and copper prices and then remain in the 4-5 percent range in the medium term.
Inflation is expected to gradually converge to CBA's target over the next 2 years, the current account deficit is expected to gradually narrow to around 5 percent of GDP and the fiscal deficit is projected at around 2.5 percent of GDP this year and 2 percent in the medium term.
The IMF added the current monetary policy stance was appropriate and it welcomed authorities' intention to maintain the existing flexible exchange rate regime.
www.CentralBankNews.info
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