The CBA’s governing board increased the refinancing rate to 5.25 percent from 4.25 percent despite anticipating a sharper contraction of the Armenian economy than was projected earlier this year.
The bank cut the benchmark rate for four times between March and September this year as the economy plunged into recession due to the coronavirus pandemic. During the most recent rate cut it forecast a GDP decline of 6.2 percent.
Armenia’s economic outlook worsened further following the ensuing outbreak of the war in Nagorno-Karabakh stopped by a Russian-brokered ceasefire on November 10. The domestic economy is now projected to shrink by more than 7 percent in 2020.
The Armenian dram has weakened against the U.S. dollar by almost 6 percent over the past month. Its exchange rate had been largely stable since 2013.
The CBA board did not mention the dram’s depreciation in a statement explaining the interest rate rise. The statement cited instead what it described as increased inflationary pressures on the Armenian economy emanating from the outside world.
Senior Central Bank officials downplayed the exchange rate fluctuations earlier this month. They said the bank’s key concern is to continue to curb inflation.
The weaker dram has already pushed up the prices of some key imported foodstuffs such as flour, sugar and cooking oil.
The International Monetary Fund praised the CBA’s monetary policy when it approved a $37 million loan tranche to Armenia late last week. At the same time it urged the bank to be ready to “adjust” that policy while maintaining “exchange rate flexibility.”