Tuesday, August 3, 2021

Armenia raises rate 5th time and may raise further

     Armenia's central bank raised its main interest rate for the fifth time and once again said it would consider tightening further in the near future to neutralize the risks of accelerating inflation expectations in parallel with the rise in domestic demand.
     The Central Bank of Armenia (CBA) raised its refinancing rate by another 50 basis points to 7.0 percent and has now raised it 2.75 percentage points since December 2020 when it began tightening in response to rising global prices and inflationary pressures.
     Last year CBA cut its rate four times between March and September by a total of 1.25 percentage points to cushion economic activity during the COVID-19 pandemic.
     The last time the refinancing rate was at 7.0 percent was in November 2016 when the central bank was in an easing cycle that began in August 2015 when the rate was lowered from 10.50 percent. This easing cycle continued until February 2016 when the rate reached 6.0 percent.
     Between February 2016 and January 2019 CBA kept the rate steady but then began easing in January 2019 and continued this process last year during the pandemic when inflation turned negative in February and March before steadying until December that year when it began to accelerate.
     Today's rate hike comes after CBA in June also said it would consider tightening monetary conditions further to neutralize the risk of accelerating inflation in parallel with the rise in domestic demand.
     Inflation in Armenia has been rising steadily since December last year and hit 6.5 percent in June, the highest since April 2015. 
     CBA added 12-month "normal" inflation hit 7.8 percent in June and forecast the annual rate would remain high until the end of this year before gradually easing and stabilizing around its 4.0 percent target in the forecast horizon.
     "Taking into account the macroeconomic developments in the external sector of the economy and the inflationary effects from that, the CB board considers it expedient to continue raising the policy interest rate," CBA said, adding it was ready to respond to ensure its goal of price stability was achieved.
     In line with its forecast, the central bank said economic activity and demand continued to grow rapidly in the third quarter, with a high inflationary environment in international food markets and higher-than-expected inflation is also seen in partner countries.
     "In this situation, the CB board continues to expect mainly inflationary impacts from the external sector of the Armenian economy," the bank said.
     The rapid recovery of demand is facilitated by high growth in consumption, larger-than-expected remittances and rapid growth of external demand, which indicated inflationary effects will continue.



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