Tuesday, March 12 2024 18:42

ArmInfo. The external inflationary impact on the Armenian economy continues to weaken significantly. Governor of the Central Bank of the Republic of Armenia, Martin Galstyan, said on March 12 at a press conference on the reduction of the refinancing rate to 8.5% from 8.75%, noting that lowering the key rate is necessary to achieve the target inflation level of 4% and ensure price stability in the medium term.

"In Q1 2024, economic activity in the world and in Armenia's main  trading partners continues to slow down, and y-o-y inflation  continues to decline. However, the inflation environment remains  elevated due to inflationary pressures emanating from the labor  market. It is expected that in the near future, the central banks of  the main Partner countries will maintain a contractionary monetary  policy stance, which could create risks of contraction in global  demand and reducing inflation. With rising geopolitical tensions in  the Middle East, supply chain disruptions and worsening financial and  economic problems in China, there are risks associated with a  slowdown in global economic growth and price volatility on  international commodity markets," he explained.

Galstyan noted that in Q4  2023, economic activity in Armenia  remained at a high level, which continued to be supported by high  growth rates in the construction and trade sectors. External demand  is slowing, but domestic demand remains relatively high. Inflation in  Armenia continues to remain low, which was mainly due to the  contractionary monetary policy of the Central Bank, deflationary  effects emanating from the external sector, as well as the  consequences of the dram appreciation. At the same time, the increase  in labor supply contributed to some extent to reducing the imbalance  between aggregate demand and supply, which was reflected in the  dynamics of wages and the cost of goods and services, with rigid  prices, a decrease in inflation and inflation expectations.

For clarity, he cited inflation data: according to statistical data,  in Feb 2024, consumer prices continued to decline, recording y-o-y  deflation at 1.7% (versus inflation of 8.1% in Feb2023). The core  y-o-y indicator for February has not yet been calculated by the  Central Bank, but the core y-o-y indicator for January was  deflationary at the level of 0.4% (versus inflation of 9.1% in   January 2023).  Being committed to its goal of price stability, the  Central Bank of Armenia is considering several scenarios in  conditions of high uncertainty. In some scenarios, major  developments, including still-high inflation expectations as well as  uncertainty over the country risk premium (CRP), require stronger  policy action to contain domestic demand, anchor inflation  expectations and ensure price stability in the medium term. In other  scenarios, however, possible economic developments, including  continued expansion of labor supply and some weakening of demand,  will create excess supply, leading to prolonged low inflation. This  suggests a path for a faster and more significant reduction in the  key rate in the medium term to stabilize inflation at the target  level.

As a result, having balanced the risks in the two abovementioned  directions, the Board of the Central Bank of the Republic of Armenia  decided to continue to gradually soften monetary conditions at a slow  pace.  Continuing to monitor the economic development scenarios, the  Central Bank is ready to respond appropriately to ensure inflation at  the target level of 4% and price stability in the medium term.