BYLINE: Venla Sipila

Global Insight
December 8, 2010

The Central Bank of Armenia (CBA) has in its December meeting decided
to keep its refinancing rate stable at 7.25%, Reuters reports. This
was the seventh month when a similar decision has been taken, and the
announcement came in spite of inflation continuing to run far above
the CBA's target rate of 4% with a fluctuation corridor of 1.5% on
either side. Indeed, according to the latest inflation figures from
the Armenian National Statistical Agency, consumer prices in November
soared by 9.6% year-on-year (y/y), inflation thus still further
accelerating from the October rate of 9.1% y/y. In month-on-month
(m/m) comparison, prices rose by 1.6%, following a gain of 1.0%
m/m seen in October. As has been the case in the recent months,
the rapid price gain was lead by surging food prices.

Significance:The CBA has accompanied its recent announcements of stable
policy rates in conditions of high and acceleration inflation by its
notion that the strengthening of inflation pressures is expected to
be temporary. This is because they mainly are the result of external
effects. Indeed, the supply-side impact from soaring food prices
has played a key part in the recent marked inflation acceleration
in Armenia. While the same can be said for most countries in the
region, this phenomenon has played a particularly notable part in
Armenia, where food still features in a very large role in the overall
consumption basket. Meanwhile, demand pressures are still fairly weak
in the economy which is recovering from a devastatingly deep recession
in 2009. However, some inflation risks are also still present from
exchange-rate developments, given the wide external deficit.

From: A. Papazian