Armenia's central bank raised its key interest rate for the fourth time in seven months and said it would consider tightening monetary conditions further in the near future to neutralize the risk of accelerating inflation expectations in parallel with the increase in domestic demand.
The Central Bank of Armenia (CBA) raised its refinancing rate by another 50 basis points to 6.50 percent and has now raised it 225 points following four rate hikes starting in December 2020.
The Central Bank of Armenia (CBA) raised its refinancing rate by another 50 basis points to 6.50 percent and has now raised it 225 points following four rate hikes starting in December 2020.
In response to the COVID-19 pandemic, CBA cut its rate four times between March and September last year by a total of 125 basis points and has now more than fully unwound those cuts.
The key interest rate is now back to the level seen in November 2016 when CBA was in the midst of an easing campaign that began in August 2015 when the rate was lowered from 10.50 percent and concluded in February 2017 with a rate of 6.0 percent.
Armenia's inflation rate eased to 5.9 percent in May from 6.2 percent in April but CBA said the 12-month normal inflation rate continued to accelerate to 7.4 percent at the end of May and it expects inflation to remain high before gradually falling and stabilizing around its 4.0 percent target.
Armenia's consumer prices are being pushed upwards on two fronts; from external sources and on the domestic side.
"Taking into account the inflationary effects expected from the external sector on the country's economy, the CBA board considers it expedient to increase the policy interest rate," the bank said, adding it still consider the risks of inflation deviating from its projected trend to be balanced given the still uncertain economic prospects.
In the second quarter Armenia's main trading partners saw a faster-than-expected recovery of demand than expected due to the positive impact of vaccines and stimulus and this is resulting in a high inflation in global commodity markets due to limited supply.
CBA expects inflation in its partner countries to exceed its previous estimates and thus have a significant inflationary impact on its own economy.
At the same time, positive developments in industry and services is pointing to a faster-than-expected recovery of Armenia's economy, with demand recovering on the back of the rapid growth in global demand, increased remittances and high growth in consumption amid continued weak investment.
The rise in consumption is helped by growing lending along with the spending of previously accumulated savings, reflecting the fact that inflationary expectations have risen, CBA said, adding it also expects inflationary effects from growing demand for production capacities.
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