Central Bank urges government to pursue more stimulating fiscal  policy

ArmInfo. The Board of the Central Bank of Armenia is convinced that in the current situation, when various sectors of the economy are suffering significant  disproportionate losses, in order to restore aggregate demand, along  with the stimulating effect of monetary conditions, a key role is  assigned to a more stimulating fiscal policy.

Taking into account the continuing low inflationary environment, as  well as the prolonged recovery of external and domestic demand, the  Central Bank Board considers it expedient to continue easing monetary  conditions (by another decrease in the refinancing rate on September  15 from 4.5% to 4.25%), assessing the need to maintain the  stimulating effect in the medium term. As a result, in the medium  term, inflation will gradually increase and by the end of the  forecast horizon will stabilize close to the target threshold.   Meanwhile, in August 2020 a decrease in consumer prices was recorded  by 0.1% (against deflationary 0.4% in August 2019), as a result of  which y-o-y inflation (compared to August 2019) increased to 1.8%  (from inflationary 0.6% a year earlier).

During the Q3, a certain recovery of the global economy has been  recorded in the external sector, however, it is estimated that the  continuing high degree of uncertainty in connection with the final  overcoming of the coronavirus pandemic will significantly restrain  and delay the recovery of gross demand and economic activity in  Armenia's main partner countries. In such conditions, the central  banks of the partner countries will continue to pursue a stimulating  monetary policy. As a result, despite the continued weak inflationary  environment in the commodity markets, the CBA Board considers that  there will be no inflationary impact on the Armenian economy from the  external sector.

The Central Bank Board notes that in the first half of 2020, private  spending have decreased more than estimated, the restraining effect  of which on domestic demand was partially mitigated by the  government's implementation of a stimulating fiscal policy.

According to the Central Bank, due to the indicated actual  development, the continuing uncertainty of the timing of overcoming  the pandemic and in these conditions, the cautious consumer and  investment behavior of society, in the coming quarters, domestic  demand and economic activity will recover at a slower pace than  expected.

The Central Bank Board believes that the risks of inflation deviation  from the planned rate are generally balanced, and if they occur, it  is ready to react accordingly to ensure price stability in the medium  term.  To note, on September 15 the Board of the Central Bank of the  Republic of Armenia lowered the refinancing rate by 0.25 percentage  points - to 4.25%, in accordance with which the rates on lombard repo  were also reduced - from 6% to 5.75%, and on deposits borrowed from  banks - from 3% to 2.75%. Prior to that, the refinancing rate was  reduced by the Central Bank three times this year (March 17, April 28  and June 16), and twice by 0.25 percentage points and the third by  0.5 p.p. - from 5.5% to 4.5% in total.