Armenia’s Central Bank Raises Key Refinancing Rate

YEREVAN — The Central Bank of Armenia (CBA) raised its benchmark interest rate for the third time in less than two months on Tuesday despite its assurances that the domestic financial system is stabilizing after sharp exchange rate fluctuations observed late last year.

During a meeting of its governing board, the CBA set the refinancing rate at 10.5 percent, up by 1 percentage point.

The minimum cost of borrowing in Armenia stood at 6.75 percent as recently as in December. It was raised to 8.5 percent on December 23 following a considerable depreciation of the national currency, the dram, resulting from falling remittances from Russia. Although the dram’s exchange rate remained stable in the following weeks, the refinancing rate reached 9.5 percent on January 21, with the CBA citing “high inflationary expectations” fuelled by the weaker dram.

Explaining the latest rate increase, the CBA said that consumer prices in the country went up by an average of 2.5 percent in January, translating into an annual inflation rate of 4.3 percent. It forecast that inflation will rise further in the coming months before easing by the end of the year.

In a statement, the bank said that the effects of the exchange rate fluctuations, which disrupted wholesale trading and banking operations in December, are now being “gradually neutralized.”

Some analysts said the fresh rate hike means that the authorities in Yerevan are still worried about a renewed weakening of the Armenian currency. “Since the Central Bank’s main mission is to keep inflation under control, it is artificially raising the cost of lending in order to prevent the dram’s depreciation,” said Vahagn Khachatrian, an economist affiliated with the opposition Armenian National Congress party.

Armenian commercial banks also seem to lack confidence in the strength of the dram. Many of them are said to have significantly limited lending or even frozen it altogether.