Armenia central bank hikes key refinancing rate to 5.25%

YEREVAN (Reuters) - Armenia’s central bank raised its key refinancing rate by 100 basis points to 5.25% on Tuesday, marking a shift in monetary policy after a gradual easing since March.

Stung by COVID-19 health restrictions and reeling from a six-week conflict between Azerbaijan and ethnic Armenian forces over Nagorno-Karabakh, Armenia’s economy is expected to contract by 7.9% this year, according to the finance ministry.

But central bank chief Martin Galstyan said the projected quickening of inflation meant a rate hike was necessary.

Galstyan told a press briefing on Tuesday that the increase in the Caucasus republic’s risk premium was also behind the board’s decision to raise rates.

The central bank forecast continued low economic activity and weak domestic demand in the fourth quarter due to the new wave of the COVID-19 pandemic and martial law that was declared over Nagorno-Karabakh, as well as the negative impact of uncertainty about economic growth prospects.

Armenia’s consumer price index rose by 1.6% year-on-year in November, up from a 1.3% increase in October.

The central bank will hold its next policy meeting on Feb. 2, 2021.

Armenia, a former Soviet republic of around 3 million people, has registered 149,120 confirmed coronavirus cases and 2,529 deaths from the respiratory disease.

Reporting by Nvard Hovhannisyan; Writing by Alexander Marrow; Editing by Mark Heinrich