Standard & Poor’s: increased interest rate and dram appreciation should help bring inflation more toward 4% target

13.10.2021 13:00
Standard & Poor’s: increased interest rate and dram appreciation should help bring inflation more toward 4% target

YEREVAN, October 13, /ARKA/. To stem inflationary pressure, with consumer price index inflation peaking at 8.8% in August, the Central Bank of Armenia has hiked interest rates several times since December 2020, by a total of 300 basis points, Standard & Poor’s said in a report. This, and the recent dram appreciation, should help bring inflation more toward the 4% target over the coming 12-36 months.

‘We think that the Central Bank of Armenia’s monetary policy framework benefits from the institution’s high degree of operational independence and its improving credibility following effective efforts to anchor inflation expectations. The dram is free-floating, and the central bank intervenes from time to time, such as in 2020, to prevent disorderly market conditions. However, the relatively high dollarization and shallow domestic capital markets in local currency somewhat inhibit the country's monetary transmission channels,’ the ratings agency said.

According to it, Armenia’s banking sector is well-capitalized, profitable, and liquid. Although the sector's stability persevered despite last year’s shocks, we expect that nonperforming loans (loans over one day overdue) could increase to up to 8.0% in 2021-2022, from 6.1% as of mid-2021. Dollarization of loans and deposits has subsided recently, albeit from relatively high levels. Nonresident deposits account for slightly over 20% of total deposits and these stayed remarkably stable during last year’s shocks--especially when compared with peers that experienced nonresident deposit outflows. We attribute this to a large share of these deposits stemming from the Armenian Diaspora, which contributed to their relative stability even during the armed conflict. Following three years of an annual average credit growth rate of 15%, loans declined by 7% in first-half 2021. We expect some lending revival in second-half 2021. -0-


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