The upper level of 5.5% inflation limit established in the budget is becoming unrealistic day by day. Besides several officials who do not lose a single opportunity to praise the government, everybody is seriously concerned about inflation.
The CB approves the reality and the fact that there are reasons for serious concerns. Ten days ago the CB board increased the refinancing rate for the purpose of resisting inflation. The CB has posted the protocol of the board session on January 8 in the web site, which contains very interesting ideas. First, the board took into consideration the information that the inflation rate in January 2011 reached 2.8% compared to the previous month, and the 12-months rate has grown by 1.2% compared to the previous month and reached 10.6%. This means that we had double-digit growth of this rate. The CB also reaffirms the fact that there is a crisis of food products in the international market and it presses the inflation tendencies inherited from 2010 to move faster.
“The board is concerned about the high level of inflation in 2010-2011 resulted from the developments in the external and agricultural sectors and the increase of the secondary influence of this process and inflation wave resulting in a double-digit inflation growth,” writes the CB statement.
The board members have also touched upon the possibility of crossing the limit of the allowable planned inflation level. According to them, as the future development in the sector of agriculture are not clear yet, and the processes in the beginning of this year show that the risk of inflation growth may grow to the ongoing processes, the possibility of crossing the limits of the planned inflation level is significantly growing.
If the CB says that the level of inflation may be high, it means that it is going to be very high for sure.
What is the CB doing to prevent the level of inflation from growing up to the dangerous level? They are increasing the refinancing rate, i.e. making the value of money more expensive. “In this issue the board agrees unanimously that in order to overcome the gap between the planned and existing levels of inflation, easing the results of secondary influence of inflation and justifying the expectations it is essential to restrict the monetary conditions and combine it with the latest changes of reserve mechanism. At the board session on February 8 the board decided to increase the CB refinancing rate and define it at 7.75%.”
There are different opinions concerning the influence on of the refinancing rate on the level of prices. Some people say this tool is effective, others say it does not work in Armenia. Former head of the CB Bagrat Asatryan, who usually criticizes the policy of the CB, believes it is an effective tool. He believes the tool of refinancing rate allows to control the level of inflation. Bagrat Asatryan believes they had to raise the interest rate last year. He says that instead of doing that the authorities decided to circulate and let out 150 million dollars from the reserve funds instead of using this tool.
The director of Star network of supermarkets Vahan Kerobyan spoke about cutting down the demand with the help of refinancing tool in an interview given to a newspaper. In this interview he said, “As the Armenian business is extremely undefended, i.e. the participation of banks in the business sector is very limited, these tools can worsen the situation. In developed countries such tools are effective but Armenia has not grown to the level of developed industrial countries to be able to regulate the inflation level with the help of such tools. In fact it can have the vice effect; the increased rates of refinancing may influence on the final prices of products.”
V. Kerobyan says the inflation is conditioned by the existence of monopolies. “In order to fight inflation the state should do two things. First, the Armenian market is highly centralized and as a result of that the prices of certain products are extremely high, thus the state should regulate the formation of prices established by these monopolies. The products of these monopolies are the ones that are growing without any justification and are extremely high.”
There are different opinions about inflation and the methods of resisting the growth of inflation, but there is an axiom in economics, which is accepted by everyone: prices continuously grow and never go down.