At the session of the Central Bank on March 9, 2010, it was decided to raise the refinancing rate by 0.5% and make it 6.5%. It is the third time in this year that the CB is changing the refinancing rate. On January 20 the CB board raised this rate from 5% to 5.5%, and later on February 16 – from 5.5% to 6%.
It means that the CB is gradually restricting the monetary policy, or, as it is usually called, is implementing a policy of expensive money. The official announcement of the CB writes that it is done for the purpose of reducing the changes from the target level.
The CB board members say that the inflation rate for the past 12 months is more by 2.4% (9.4%) than the same rate of the previous month. But the reason for this drastic growth of the inflation rate is the inflation in February of the previous year (1,8%).
The board members believe the inflation reached its maximum point in February. “After reaching the maximum point in February, it will go down starting from the beginning of March notwithstanding the increase of the prices of certain utility services,” writes the statement. Meanwhile it mentions that due to the growth of raw materials in the international market and main consumer products the planned level of inflation will be kept in the planned limits. Generally such policy of raising the refinancing rate is a normal practice in the world and this tool is used to resist the inflation. To note, it is the interest rate, which the Central Bank defines for refinancing trade banks and credit companies. The higher the refinancing rate is, the higher the credits provided by trade banks to private companies and physical persons are. It is like mechanism to define the median price of the money. It is a directive for the participants of the financial market. The higher the refinancing interest rate is, the more expensive the money is. Thus, if the money is expensive, it is supposed that the demand capacity will be cut down, and accordingly the inflation will be resisted.
There are different opinions about this issue and whether this mechanism is effective in Armenia. Many independent economists believe the refinancing rate does not play an important role in the process of the inflation formation in Armenia as the banking system of Armenia is not involved in business financing that much. Likewise, the reduction of the rate does not influence on the economic activeness in the country either, does not stimulate the demand (during 2009 the CB reduced the refinancing rate for several times, and in the end of the year it reached 5%).
There are economists who say that the increase of the refinancing grate is not only inefficient for Armenia, but even it is very bad for the economy. For example, former minister of economy Edward Sandoyan said the following in a recent interview: “We are resisting the possible potential of development of the economy, but we need to encourage it but not to resist. As the exchange rate is not formed based on the floating policy, there are changes in the market, which should not be allowed to happen. Instead of letting the economy breath and develop we are resisting it and pressing down.” Former PM Hrant Bagratyan has numerously criticized the high rate of refinancing rate referred to the example that the developed countries reduced this rate to zero in the conditions of crisis.
By the way, both Sandoyan, Bagratyan and other economists say that the reason of the current economic situation in the country is not the developments in the world economy, but domestic institutional issues. Besides that, they advise not to spend a lot of money on resisting the dram devaluation, and they assure that this devaluation will be helpful for the economy, specifically for the efforts to support the export. It seems that the Central Bank is going to take this advise. According to the information of the media service of the RA Central Bank, in the NASDAQ ARMENIA OEMEX CJSC 2.750.000 USD has been bought and sold at the approximate median rate of 391.37 dram for one dollar, and the closing rate was 390.75 dram.
As for the inflation, the citizens don’t even look at the predictions and opinions of experts and they have their own opinions and idea about the process. For example, as they have seen that the exchange rate drastically grew from 385 to 390 in currency exchange offices, they are sure that very soon the prices of imported goods and petroleum will grow as well. They don’t care about the refinancing rate and other things as it is not about the economic rules or policy, but about the wish and gross calculations of oligarchs who are totally controlling the economy.