Armenia’s central bank maintained its key refinancing rate at 6.0 percent for the second consecutive time, saying the risks to inflation now appear balanced and it expects inflation to continue to increase to around its target band this year.
The Central Bank of Armenia (CBA), which slashed its rate 12 times by a total of 4.50 percentage points between August 2015 and February 2017, said inflation in April had turned positive, mainly due to higher commodity prices.
Armenia’s inflation rate rose to 1.2 percent in April from minus 0.1 percent in March as inflation turned positive for the first time since December 2015.
The CBA expects inflation to continue to rise toward its target of 4.0 percent and stabilize within its target band of 2.5 percent to 5.50 percent.
Although the global economic outlook was improving, the central bank expects only moderate inflationary effects from external forces, with the effects of past rate cuts continuing to support a recovery in domestic demand.
As in its previous statement from March, when the central bank also kept its rate steady, the CBA said economic activity improved in the first quarter of this year, mainly in the sectors of industry, services and trade.
The economy of Armenia, located east of Turkey and west of Azerbaijan, was hit hard by Russia’s economic crises, with the exchange rate of its dram plunging in November 2014 in response to the fall in Russia’s ruble.
In response, the CBA raised its rate by a total of 375 basis points between December 2014 and February 2015, helping stabilize the dram on currency markets.
Since then the dram has been more stable and was trading around 484 to the U.S. dollar, largely unchanged since the start of this year. Last month the International Monetary Fund said Armenia’s economy was showing signs of a recovery due to growth in private sector credit but cautioned the country still faces “significant challenges,” with volatile economic growth that is narrowly based, high unemployment and poverty, and rising public and external debt.
A rise in remittances from workers abroad and higher copper prices may not endure, and growth in Armenia’s key trading partners could be weaker than expected, the IMF added.
The IMF forecast economic growth in Armenia this year of around 3.0 percent, up from 2016’s 0.2 percent. Inflation is seen around 1.75 percent by the end of this year.
“The Central Bank of Armenia (CBA) should remain open to further policy easing, consistent with the inflation targeting framework,” the IMF said, adding that its board is schedule to review its Extended Fund Facility (EFF) arrangement with Armenia in late June.
If approved, a further approximate US$21 million would be released, bring total disbursements under the current agreement to around $80 million.