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The Central Bank of Armenia (CBA) has significantly cut its benchmark lending rate, citing easing inflationary pressures and the need to shore up the crisis-hit Armenian economy.

In a statement posted on its website at the weekend, the CBA said its governing board decided to lower the refinancing rate by 100 basis points to 6.25 percent. The bank had already cut it by 25 basis points in early April.

The statement argued that the latest macroeconomic trends put the Armenian authorities on track to meet their inflationary targets for this year. The National Statistical Service (NSS) recorded an average inflation rate of 2.3 percent during the first four months of 2009.

According to the NSS, inflation was sharply down from the same period of 2008 despite a surge in the cost of the key utility services in Armenia, which took effect on April 1, and a nearly 20 percent devaluation of the national currency, the dram, that preceded it. The dram depreciation pushed up the prices of some basic foodstuffs imported to the country. That led the CBA to raise the minimum cost of borrowing by 100 basis points in early March.

Economic recession in Armenia has accelerated since then, with Gross Domestic Product shrinking by 9.7 percent in January-April. Vache Gabrielian, the CBA’s deputy governor, said on Monday that the bank now expects the domestic economy to contract by 7 to 8 percent in 2009. The CBA forecast a full-year GDP drop of 5.8 percent as recently as last week.

“In our opinion, one should not anticipate a deeper economic decline,” Gabrielian said, speaking at a economic forum held in Yerevan. “In all likelihood, one may anticipate an economic decline of 7-8 percent in annual terms.”

Speaking to RFE/RL, Gabrielian predicted that Armenia’s macroeconomic performance will improve markedly in the second half of the year because “substantial inflows will be channeled into the economy.” The official appeared to refer to hundreds of millions of dollars in anti-crisis external loans secured by the Armenian government and Central Bank in recent months.

In its statement, the CBA said the rate cut should also stimulate economic activity in the country. “The Board believes that in the existing situation it is much more effective to assist in the policy of support for economic growth with a drastic loosening of lending terms,” it said.
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