Reduction of refinancing rate in Armenia is associated with  significant easing of inflationary environment

ArmInfo.The Central Bank of Armenia, having promptly reacted to curbing inflation, can now afford to reduce the refinancing rate for the second time. Deputy Chairman of the Central  Bank of the Republic of Armenia Armen Nurbekyan expressed this  opinion during today's press conference on the next reduction of the  refinancing rate from 10.5% to 10.25%.

It should be noted that over the previous two years, from December  2020 to December 2022, the Central Bank of the Republic of Armenia  raised the refinancing rate thirteen times - from 4.25% to a record  10.75%, maintaining this level until June 13, 2023, when the first  reduction to 10.5% and from August 1 the second one- by the same  0.25% took place.

The reduction of the refinancing rate in Armenia is associated with a  significant easing  of the inflationary environment. As Nurbekyan  noted: "Official y-o-y inflation continued its rapid decline reaching  0.5% deflation in June this year (from y-o-y 10.3% inflation in June  2022), along with which the core y-o-y inflation also decreased to  1.5% in June this year (from y-o-y 9.4% inflation in June 2022)".

Price stabilization in the international commodity markets  significantly reduces the degree of external inflationary pressure on  Armenia. On the other hand, the country is registering higher than  expected economic activity, especially in the construction and  services sectors. These factors, along with the still ongoing inflows  of capital, labor and tourists, provide conditions for the  possibility of a reduction in the refinancing rate.

In Q2 2023, the global economy maintained low economic activity and  y-o-y inflation continued to decline.  However, the cost of rigidly  priced goods and services remains high in all partner countries, with  continued inflationary pressures coming from labor markets.  Therefore, the central banks of the partner countries will continue  to pursue a contractionary monetary policy in the near future.

At the same time, Nurbekyan noted that along with the weakening of  exogenous price factors, a restrained monetary policy and a  significant appreciation of the dram led to the reduction of  inflationary environment.  And, nevertheless, the country has a high  level of aggregate demand and inflationary expectations have not yet  been overcome, within which the decline in prices for services and  some goods is corrected at a very slow pace.

As he noted, according to the scenario of the Central Bank of  Armenia, inflation in Armenia will be quite low in the short term,  then it will gradually increase and will approach the target level of  4% in the medium term.

Commenting on the Fitch rating agency's forecast of a moderate  depreciation of the Armenian dram (this is also mentioned in the  EDB's forecast analysis, ed. note), Nurbekyan noted that so far there  are no factors that indicate a possible depreciation of the dram,  since the inflow of capital and skilled labor, although stabilized,  but continues to be at a high level. "This issue can also be related  to the growth of productivity in the conditions of high economic  activity, which is also associated with the revaluation of the  national currency. Nevertheless, the scenario of a gradual  depreciation of the dram is possible, since there are a large number  of factors affecting the exchange rate, including geopolitical ones,"  Nurbekyan  concluded.