Armenia's central bank has decided to cut its refinancing rate by 50 basis points (bp) to 6.75% to stave off deflation, the regulator said on September 27. Deflation in Armenia deepened from 1.3% y/y in July to 1.9% y/y in August, prompting the monetary policy intervention, it added.
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, consumer prices have stayed in negative territory, prompting the regulator to cut key rates five times between March and August, lowering it from 8.75% in March to 7.25% in August or by 25 bp in each intervention.
Last week, the central bank decided to lower banks' foreign currency reserve requirement from 20% to 18%, following a cut in the requirement from 24% to 20% in December. Previously, the regulator doubled the requirement to 24% in December 2014 in order to bolster the Armenian dram, which was quickly depreciating, and to curb currency speculation.
In an editorial on September 27, the Armenian Time daily has speculated that the central bank's changing monetary policy is aimed at supporting the newly-appointed prime minister, Karen Karapetyan. The new premier is looking to support the business environment and to encourage lending. Some of the reforms he has proposed have been unpopular with the more established members of his cabinet. Referring to the foreign reserve requirement, the newspaper wrote that the requirement had not been changed for one year and eight months, and that recent economic developments did not necessitate such a change. Instead, political motives were behind the regulator's decision.
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