YEREVAN

Armenia’s central bank raised its key refinancing rate to 8.0 percent from 7.75 percent to curb rising inflation, which went well beyond the target range.

The Lombard repo rate was raised to 9.50 percent from 9.25 percent and the deposit rate – to 6.50 percent from 6.25 percent.

In September last year, the central bank raised the key refinancing rate by 0.25 percent to 7.25 percent, the fifth increase since February, when it raised it by 0.25 percent. In November the rate was kept unchanged and raised to 7.75 percent in December.

Consumer prices in Armenia were up 7.7 percent year-on-year in December after 9.7 percent inflation in November. Inflation in December was 1.6 percent compared to a month earlier when the consumer price index rose by 1.7 percent. In January-December, annual inflation was 7.2 percent year-on-year.

Armenia’s government projected annual inflation in a range of 2.5-5.5 percent in 2021, but the central bank said that annual inflation would exceed the target. The government projects annual inflation in the same range this year.

In November last year, the central bank governor Martin Galstyan did not rule out the refinancing rate increase amid a sharp rise in annual inflation

“We estimate that over the next year (2022), most likely at the end of the second quarter, we will get closer to our target,” Galstyan said.

Galstyan said that despite the persistence of inflationary pressures in the external sector and in the Armenian economy, the central bank assessed that “the consistent tightening of monetary conditions aimed at the future since the end of last year had a sufficient impact on the settlement of outstripping demand, curbing inflation and ensuring the goal inflation in the medium term”.

Though Armenia reported rapid growth in recent years, a year of restrictions to curb the spread of  COVID-19 and a six-week conflict between Azerbaijan and ethnic Armenian forces over the Nagorno-Karabakh region and the surrounding territories have taken their toll on its economy. In November 2020, Armenia accepted a Russian-brokered ceasefire to end the conflict which secured territorial gains for Azerbaijan. The country’s economy contracted by 7.6 percent in 2020, mainly reflecting a decline in services and trade.

The economy started to show its first signs of recovery in May. That led to the revision of the economic growth forecast by the government to almost twice the rate it previously predicted – to 6 percent from 3.2 percent.

The country’s economic activity grew by 4.3 percent in the first 10 months of 2021 compared to the same period last year, supported by the growth in almost all sectors of the economy.

In January 2022, the World Bank said that Armenia’s economy would expand by 4.8 percent.

“In Armenia, growth is expected to accelerate in 2023, as robust private consumption and a more stable investment climate support domestic demand and offset the drag from ongoing fiscal consolidation,” the World Bank said in its updated outlook of global economy in 2022 and 2023.

“The forecast is predicated on an easing of geopolitical tensions, limited pandemic-related disruptions supported by progress with vaccinations, and improving consumer and business confidence. Weighing on the outlook are legacy structural issues and weaker oil prices in Azerbaijan, as well as challenges with reform implementation in Armenia.”

The International Monetary Fund projects growth at 4.5 percent in 2022.

In May, Fitch Ratings affirmed Armenia’s long-term foreign-currency issuer default rating (IDR) at ‘B+’ with a stable outlook.

Fitch Ratings said in July that Armenia’s economy would experience a moderate recovery in 2021 and this year as the country returned to growth after the COVID-19 pandemic and the flash war with Azerbaijan.

Fitch also said that Armenia also had a robust macroeconomic and fiscal policy framework, and credible commitment to reform, both of which were underpinned by the IMF stand-by arrangement.