Friday, September 05, 2008

Right time for tight monetray policy?

The central bank just raised the refinancing (repo) interest rate by another 0.25 points to 7.75. This follows a series of rate hikes all designed to keep inflation in check; 0.25 points in each of August, July, June, May, and April. At the same time, CBA has also intervened in the exchange market to support the value of the Dram in March and to a lesser extent in April, thereby restricting the supply of money.

The major fear is that higher import prices, and reflecting on the supply shock that recent events in neighboring Georgia had brought about, would give rise to higher inflation rates. I wonder whether this is the time for a tight monetary policy. Can the CBA really keep prices in check? and at what cost to economic activity, if successful at all?

Foreign exchange intervention ($millions)