The Central Bank of Armenia (CBA) raised its benchmark interest rate for the first time in more than a year on Tuesday, citing the need to curb inflation after a considerable depreciation of the national currency, the dram.
The refinancing rate was set at 8.5 percent, up by 1.75 percentage points from its previous level set in August and upheld by the CBA’s governing board as recently as on December 3. The board had steadily lowered the minimum cost of borrowing in the country since August 2013 amid falling inflation and slowing economic growth.
In a statement released after the latest board meeting, the CBA said that inflationary pressures on the Armenian economy have grown in recent weeks due to the dram’s weakening resulting from shrinking “hard currency inflows from the outside world.”
Russia, the principal source of those remittances, has seen its currency, the ruble, depreciate by almost half since the beginning of this year because of falling oil prices and Western economic sanctions. The process accelerated last month and reached its climax a week ago.
The dram fell sharply on December 15-16 before rallying strongly in the following days. Its exchange rate has been relatively stable so far this week. Trading at an average of 462 drams per U.S. dollar on Tuesday evening, the Armenian currency was 11 percent weaker against the dollar than in early November.
The dram has regained much of its lost value despite the absence of large-scale dollar injections in the local currency market made by the CBA. The Central Bank sold only $2 million to commercial banks on Tuesday. Its daily dollar sales averaged $6 million earlier this month.
The dram depreciation has pushed up the prices of foodstuffs and other essential goods imported to Armenia. According to the CBA statement, the consumer price index rose by 1.3 percent in November, translating into a year-on-year inflation rate of 2.6 percent.
The CBA expressed confidence that full-year inflation in will not exceed the maximum target level of 5.5 percent set by the Armenian authorities for 2014. It said the higher refinancing rate will also ease “future inflationary pressures.”