Tuesday, May 4, 2021

Armenia hikes rate 3rd time to cool inflation pressure

      Armenia's central bank raised its main interest rate for the third time in 6 months, saying it is necessary to gradually neutralize monetary stimulus due to inflationary pressures expected from other countries and from the domestic economy, which is recovering faster than expected.
     The Central Bank of Armenia (CBA) raised its refinancing rate by another 50 basis points to 6.0 percent and has now raised it 175 points following hikes in December 2020 and in February.
     "The board agrees that in the near future monetary policy will be consistent in neutralizing the risk of accelerating inflation expectations without harming the recovery of domestic demand as much as possible," the bank said, signaling it may raise rates further if needed.
      CBA said it is ready to respond to the risk that inflation deviates from the expected medium-term trend to ensure it achieves its objective of price stability.
     The central bank began tightening its policy stance in December last year when it raised the rate by 100 basis points as it began unwinding 4 rate hikes in early 2020 in response to the COVID-19 pandemic.
     The refinancing rate is now back to the level it was between February 2017 and January 2019 before CBA embarked on an easing cycle that continued until September 2020 when the rate was cut to a historic low of 4.25 percent.
      Central banks in Central Asia have been among the most aggressive in tightening their monetary policy this year to ward off rising inflationary pressures and keep inflation expectations in check, mainly due to the relative high impact of rising global food and commodity prices on consumer prices.
     Of the 13 different central banks that have raised rates this year, four of these are in Central Asia - Tajikistan, Kyrgyzstan, Georgia and Armenia - and all four have raised their rates twice, accounting for 42 percent of the 19 rate hikes worldwide so far this year.
     Inflation in Armenia, which had a military confrontation with neighboring Azerbaijan over the Nagorno-Karabakh region in October last year, rose for the fifth month to 5.8 percent in March to the highest level since April 2015, well above the bank's 4.0 percent target.
     CBA said the recovery of economic activity and demand, both globally and in its main trading partners, is leading to higher-than-expected inflation and it continues to expect an inflationary impact from the external sector to its economy.
     "The development of economic activity in the first quarter of 2021 indicate more positive economic trends that previously forecast by the central bank," CBA said, adding aggregate demand will recover faster than expected, helped by remittances and lending, though it will still remain weak.
     As a result, inflationary effects are beginning to emerge in Armenia's economy.
     Under the conditions of neutralizing the risk of accelerating inflation expectations without harming the recovery of domestic demand, CBA expects inflation to gradually decline after some acceleration in the short run before stabilizing around the 4.0 percent target. 
     Armenia's dram has been relatively stable this year after depreciating 8.3 percent last year against the U.S. dollar and was trading at 522.5 to the dollar today, down 0.5 percent this year.



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