The Central Bank of Armenia (CBA) has announced another sizable increase in its benchmark interest rate, citing “high inflationary expectations” resulting from a recent weakening of the national currency, the dram.
The CBA raised the refinancing rate by 1 percentage point to 9.5 percent, the highest level in more than three years, at a meeting of its governing board held in Yerevan late on Wednesday.
In an ensuing statement, the bank said that consumer prices in Armenia rose by an average of 3 percent in December, translating into an annual inflation rate of 4.6 percent. Inflation stood at only 2.6 percent in November.
The Armenian dram began depreciating at around the same time amid falling remittances from Russia, which has been hit hard by falling oil prices. The dram fell sharply on December 15-16 but regained much of its lost value in the following days despite the absence of large-scale dollar injections in the local currency market by the CBA.
Instead, the Central Bank tightened minimum reserve requirements for commercial banks and cracked down on what it called speculative currency trading. It was not until December 23 that the CBA raised the minimum cost of borrowing from 6.75 percent to 8.5 percent.
The dram has only slightly depreciated since then. Trading at an average of 470 drams per U.S. dollar on Thursday, the Armenian currency was more than 12 percent weaker against the dollar than in early November.
“Although inflationary expectations that emerged in late 2014 have somewhat eased, they still remain high,” said the CBA statement. It said the higher refinancing rate will help to suppress them further.