The Central Bank published a report on inflation tendencies. This is a very interesting document because the economic forecast of inflation is too optimistic in it.
The CB specialists think that during this year and till 2015 the inflation rate will stay within the limit of 2.5-5.5%. In other word, they believe inflation will not exceed the planned level.
According to the CB, during the coming months the inflation rate will be around the permitted lowest limit of fluctuations (the permitted range of fluctuations is 4±1.5%). “In the predictable timeframes neither the world nor our local economic developments show any prospects for enlargement of inflation, thus during the coming months the inflation level will be around the lower limit of permitted inflation frames. In this situation the Central Bank’s activities will result in weakening the monetary policy and during the year the inflation rate will approach 4%, which will keep at the same level till the end of the predictable horizon. The high level of financing the economy will stay in the predictable limits, as well as there will be reduction of the level of dollarization in the economy and financial mediation,” writes the Central Bank’s report.
The report consists of 36 pages, in which the CB specialists analyze the external and internal factors driving the inflation process. They have analyzed separate sections of the economy, processes in different product markets, etc. For example, according to the CB’s specialists, in the international market of sugar the tension will ease. “Specifically the good harvest in Europe, Thailand and Russia will compensate the slow recovering of the Brazilian market and its impact on the world market. Even though some part of the demand will be filled, there will be still low level of storage. As a result in 2012 there will be slight inflation tendencies for the international prices of sugar.” Time will show what this “slight inflation tendency” may mean for us.
It is not the responsibility of the Central bank to analyze separate markets. This institution is involved in more global and long-term analysis and has come to the following conclusion: “In the predictable timeframes neither the world nor our local economic developments show any prospects for enlargement of inflation, thus during the coming months the inflation level will be around the lower limit of permitted inflation frames. In this situation the Central Bank’s activities will result in weakening the monetary policy and during the year the inflation rate will approach 4%, which will keep at the same level till the end of the predictable horizon. The high level of financing the economy will stay in the predictable limits, as well as there will be reduction of the level of dollarization in the economy and financial mediation.”
In a word, the Central Bank has published an extremely optimistic report. However, there is something in the report that does not let us be very optimistic and hope that the prices will not exceed the permitted limits. The problem is in the exchange rates, namely the exchange rate of US dollar and the recent rapid growth of the exchange
rates. In a short time the exchange rate of dollar crossed the psychological limit of 400, and during the next days there were no transactions with US dollar, which means the market of foreign currency exchange is in a discreet situation. The price of dollar was high and banks did not want to buy at the offered prices. US dollar was being offered at a very high rate – 404 drams for one dollar. Several trade banks were willing to buy US dollar for 403 drams, but no one was willing to sell dollar at that price. In the market of cash trade of currency exchange offices were buying dollar at 402.5 and selling at 404 drams.
This process will lead to increase of prices of products because importers will not agree to have losses because of the currency exchange rate fluctuations. The capacity of import is huge for Armenia and can be compared with the domestic consumption gross capacity. For example, according to recent data published by the statistics services, during the four months of this year the import capacity amounted 1.312 billion dollars. The negative balance of foreign trade was 872 million dollars.
Based on the above said and the ongoing processes in the market it is hard to believe that it will be possible to keep the exchange rate in the planned limits. Without prejudice to the professionalism of the representatives of the Central Bank, we would like to note that processes are moving faster than the forecast of the CB representatives and what they write on the paper.
However, in our country stability of prices is reported not only by the Central Bank, so if the Central Bank fails to keep the prices stabile, the national statistics services can always correct their mistakes and report stability that fits with the planned limits.