Tuesday, January 30 2024 19:09

ArmInfo.A weak deflationary impact on the Armenian economy is expected from the external sector. Governor of  the Central Bank of the Republic of Armenia, Martin Galstyan, stated on at a press conference January 30, presenting the rationale for today's reduction in the refinancing rate by 0.5 pp - setting it at 8.75%.

In particular, he explained: "In the fourth quarter of 2023, economic  activity in the world and the main partner countries of Armenia  continued to slow down. The inflationary environment in international  commodity markets is softening, and global inflation is slowing down  somewhat. However, the positive dynamics of the partner countries'  labor markets "continues to contribute to the expansion of demand. At  the beginning of 2024, due to the aggravation of geopolitical  developments in the Middle East, a certain increase in energy prices  was recorded and risks of disruption of supply chains emerged. In  this situation, the central banks of leading countries will gradually  ease restrictive monetary conditions in the near future." The head of  the Central Bank noted that the high rates of growth of the  construction and service sectors continued to contribute to the  maintenance of high economic activity in Armenia in the fourth  quarter.  External demand slowed down somewhat due to slowdown in  tourism growth. At the same time, domestic demand remains high, which  is reflected mainly in the high growth rate of private consumption.  Given the weak deflationary impact from the external sector and the  contractionary monetary policy implemented in previous years, a low  inflation environment remains. The latter also continues to be  reflected in the labor market through a slight slowdown in wage  growth and lower inflation expectations.

As Galstyan emphasized, in the current situation, the Central Bank'  Board considered it appropriate to reduce the the refinancing  rate   setting it at 8.75%- from 9.25%.The Central Bank will continue to be  consistent in its actions to ensure demand adjustment and  stabilization of inflation expectations. In the monetary policy  scenario, y-o-y inflation will remain below the target threshold in  the near future, but will then gradually increase and stabilize in  the medium term near the target of 4%. He noted that in December  2023, compared to December 2022, deflation of 0.6% was recorded in  Armenia (according to statistical data), and the base indicator  (calculated by the Central Bank) for this period was at the  deflationary level of 0.4% (against the corresponding y-o-y inflation  of  8.3% and 9.5% in December 2022, ed. note).

According to the Central Bank Board, the risks of inflation deviating  from the planned trajectory are largely balanced. If risks of any  direction arise, the Central Bank will respond appropriately in order  to ensure price stability.

A year ago, in January 2023, the refinancing rate remained at the  historically maximum level of 10.75%, remaining at this level until  June 13, when the first reduction followed after two years of  repeated increases. So, on June 13, 2023, the key rate was first  reduced by 0.25 p.p., then on August 1 - by the same amount, then on  September 12 the decline was more noticeable - by 0.5 p.p., after  which on October 31 the rate was reduced by 0.25 p.p. and the same on  December 12th. Before this, the rate had been increasing for 2 years,  reaching a record level of 10.75% at the end of 2022; in particular,  in 2021-2022, the key rate was revised 12 times upwards, and in 2023  - 5 times downwards. However, today's key rate level of 8.75%, even  after the reductions made 6 times (in 2023 and January 30, 2024), far  exceeds the minimum level of 4.25%, which was recorded in September  2020 before the start of the period of increases (from December 2020  to December 2022).