Citing a continuing fall in inflation, the Central Bank of Armenia (CBA) on Tuesday cut its benchmark interest rate, raised sharply after last year’s depreciation of the Armenian dram, for a third time in four months.
The CBA’s governing board set the refinancing rate at 8.75 percent, down by 1 percentage point from previous level set on November 10.
In a statement, it argued that annual consumer price inflation in the country fell to 1.2 percent at the end of November owing to weak domestic consumer demand and the decreased cost of major imported commodities. “The CBA board reckons that inflation will remain at a low level in the months to come,” read the statement.
It is already firmly within the Armenian authorities’ inflation target band of 4 percent (±1.5 percentage points) set for this year.
The refinancing rate stood at 6.75 percent a year ago. The CBA raised it to 8.5 percent in December 2014 in response to a roughly 17 percent depreciation of the dram caused by falling cash remittances from Armenian migrant workers in Russia. The bank also raised other lending rates as well as minimum reserve requirements for Armenian commercial banks.
The refinancing rate reached 9.5 percent in January and 10.5 percent in February, with the CBA citing “high inflationary expectations.” The dram’s value against the U.S. dollar has barely changed this year, leading the Central Bank to cut the rate by 0.25 percentage points in August.
The Armenian currency has essentially avoided further depreciation since then, despite a further drop in oil prices resulting in a renewed weakening of the Russian ruble. The latest rate cut suggests that the CBA does not expect the dram to come under strong pressure or intend to prevent its possible weakening in the coming weeks. The Central Bank said on Tuesday that it might again lower the minimum cost of borrowing in Armenia soon “in case of the absence of additional external and internal risks.”
The easing of the bank’s monetary policy is supported by the International Monetary Fund. “Gradual normalization of monetary conditions through unwinding of the emergency measures introduced in 2014 would also help support a resumption of bank lending and growth,” Mitsuhiro Furusawa, the IMF’s deputy managing director, said in early November.
Furusawa also urged the authorities in Yerevan to allow “greater exchange rate flexibility” and “limit interventions” in the local currency market.
As recently as in April, the IMF expected Armenia to fall into recession in 2015 due to the spillover effects of Russia’s economic troubles. But the fund revised its outlook in the following months, saying that the country will post modest growth. Late last month, the CBA forecast a growth rate of at least 3.2 percent.