Armenia's central bank cuts rate to fend off deflation

By bne IntelliNews August 17, 2016

Armenia's central bank has cut its refinancing rate by 25 basis points (bps) to 7.25% to fight off deflation, the bank said on August 16.

Unlike its regional peers, Armenia has enjoyed relative monetary stability in recent years, following a 14% depreciation of the dram in December 2014. As such, inflation has remained within the government's target of 2.5% to 5.5%. Over the past six months, however, the CPI has stayed in negative territory. Consumer prices fell 1.3% y/y in July, to follow a 1.1% drop in June. In monthly terms, deflation deepened from 0.5% in June to 2.3% in July.

In order to prevent that the deflationary trend threatens the fragile economic growth, the regulator has moved to cut its key rate five times since February, every time by 25bps. The bank said is expects the deflationary trend to continue in the coming months before easing significantly by the end of the year.

"In the current situation, the board considers it appropriate to ease monetary conditions, as a result of which the deflationary environment should be gradually neutralised," it said in a statement on its website.

The high dollarisation of the Armenian banking sector, in which over 60% of deposits are denominated in dollars, undermines the efficacy of monetary policy and threatens banks' asset quality, ratings agency Fitch noted in a May report. 

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