Announcement

Collapse
No announcement yet.

Armenian central bank opts for further rate cut despite inflation ra

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Armenian central bank opts for further rate cut despite inflation ra

    IHS Global Insight
    January 2, 2014


    Armenian central bank opts for further rate cut despite inflation rate
    remaining above target

    by: Lilit Gevorgyan


    Despite inflation rate remaining significantly above the government's
    target range, the Central Bank of Armenia cut its refinancing rate to
    7.75% from 8.0% last week.

    During its latest board meeting on 24 December the Central Bank of
    Armenia (CBA) introduced a 25-percentage-point reduction to its key
    refinancing rate, bringing it down to 7.75%. The latest rate cut was
    only just over a month ago, on 12 November 2013, when the CBA brought
    down the 8.0% rate by 0.5%. In a statement published on the CBA's
    website the Board explained that three factors had contributed to the
    decision.

    Firstly, consumer price inflation continues on its downward trend,
    although it is still outside the upper threshold of the 2.5-5%
    inflation target set up by the CBA. According to Armenia's Statistics
    Office, consumer price inflation rose to 6.6% in November 2013,
    slowing down from 7.1% reported in the previous month. The breakdown
    of November consumer price index showed that the rise in food prices
    and alcoholic beverages and tobacco were the main drivers of
    inflation, rising 5.2% and 6.8% year on year (y/y) respectively. Cost
    of services posted a double-digit y/y rise, standing at 10.1%, and
    growing nearly at the same rate as in October 2013, when prices for
    services increased by 10.3% y/y. The overall contribution of this
    sub-component to the overall CPI is relatively small, but the CBA also
    noted that consumer prices, including food prices, are likely to trend
    down in the coming month.

    Secondly, another contributor to the latest CBA decision is the weak
    real GDP performance in the third quarter of 2013. The real economic
    activity expanded by 2.6% y/y during January-September 2013, slowing
    down from a 3.5% y/y gain in the first half of the year. Meanwhile, in
    annual terms the real GDP has posted 3.1% growth during
    January-November, which was mainly a result of sluggish private
    consumption, as well as decline in fixed investments. CBA also noted
    that it expects the year-end private consumption growth to rise only
    by 2.3% y/y, while fixed investment is expected to decline by 7.6%
    y/y. The slowdown is expected to increase disinflationary pressures in
    the coming months.

    Thirdly, the central bank also assessed that there are not external
    pressures contributing to inflation in the coming months. Thus,
    according to the CBA's press statement average Brent dated crude oil
    prices have declined 1.9% y/y in the fourth quarter of 2013 compared
    to the previous three months. Meanwhile, copper trading in London's
    Metal Exchange declined 9.5% y/y in prices in the fourth quarter.
    Finally, world prices for coarse wheat and raw sugar prices posted
    double-digit y/y drops in the last three months of 2013.

    In addition, the CBA noted that during January-November 2013,
    Armenia's current-account gap has been narrowing, due to increase in
    real exports and also rise in remittances. Thus, exports on a customs
    basis (FOB), expanded 8.4% y/y during the first 11 months of 2013,
    while imports, customs basis (CIF), expanded by 4.2% y/y. More
    importantly, remittances, one of the largest contributor to Armenia's
    foreign currency inflows, increased by 9.5% y/y. Meanwhile, the
    Armenian national currency, the dram, maintained a relatively stable
    exchange rate against a basket of foreign currencies. Thus dram's
    average monthly exchange rate against the US dollar in October
    strengthened only by 0.2% (AMD405.3/USD1), while the dram's value
    against euro declined 0.1% in the same period (AMD554.4/EUR1).

    Outlook and implications

    We expect that the Armenian monetary authorities are likely to cut the
    refinancing rate further in the coming months, while inflation rate is
    expected to fall within next two quarters under the upper threshold of
    the target range, meaning just under 5%. This is due to expected
    further weakening of consumer spending, in the view of slow real
    disposable income growth. Furthermore, the main inflationary pressure
    in 2013 came from nearly 60% increase in natural gas prices, initiated
    by the Russian-controlled energy importer and distributor,
    ArmRusGazArd. However, with Armenia's decision to join the Russian-led
    Customs Union, the country has received a 30% price discount as a
    result of cancelling the export duties on Russian energy supplies.

    While the Armenian government has been proven prudent in its public
    spending policies in 2013, at the same time even the IMF has
    recommending Yerevan to increase its government expenditure, and
    address some of the social issues, while trying to offset these
    expenses through improved taxation. Under the 2014 budget
    infrastructure and housing spending is likely to increase, but the
    provisions for welfare spending are too small and unlikely to stoke
    consumer confidence.

    Other sectors of the economy - particularly private investment - are
    likely to remain a drag on overall economic performance, which will
    continue to have a negative impact on the overall employment rate and
    further curtail household spending intentions.

Working...
X