CBA governor explains policy rate increase to 6.75%

The Central Bank of Armenia (CBA) raised its policy rate to 6.75% on September 15 amid risks stemming from stronger domestic demand, expanding external demand and rising inflation expectations, CBA Governor Martin Galstyan said at a press conference.

The CBA Board decided to raise the policy rate by 0.25 percentage points at its September 15 meeting. The decision came as 12-month inflation remained above the target, reaching 4.4% in August, while 12-month core inflation stood at 4.8%.

“Amid the prolonged nature and certain expansion of regional conflicts, the risks of a further weakening in global demand and, at the same time, increasing inflationary pressures are gradually becoming more tangible. In the United States, strong investment activity and growing concerns over fiscal sustainability have created upside risks to long-term neutral interest rates, with corresponding implications for neutral rates and capital flows in emerging markets.

In the Eurozone and Russia, despite a modest recovery in economic growth in the second quarter, structural problems are deepening, leading to a deterioration in the medium-term growth outlook as well. Amid rising tensions in the Middle East, energy prices have remained at elevated levels, while the gradual decline in accumulated inventories is increasing market vulnerability to potential new supply shocks. In this context, the risks of central banks in major economies further raising policy rates and keeping them at elevated levels for an extended period have become more tangible,” Martin Galstyan said.

According to him, economic growth in Armenia accelerated in the second quarter of this year, running above its long-term sustainable level.

“Developments in the construction and services sectors continued to contribute significantly to economic growth, pointing to the presence of excess demand. This is also reflected in the high growth rates of imports of final consumption goods and retail trade. Moreover, there are also signs of expanding external demand, primarily reflected in a significant increase in visits to Armenia, which also creates significant risks of faster wage growth and acceleration in services prices in the relevant sectors.

On the other hand, the risks of excess supply forming in the domestic market, as well as of weakening consumer and investment confidence, stemming from restrictions on exports to Russia, persist,” he said.

Martin Galstyan emphasized that amid current macroeconomic developments, financial market participants in Armenia on average expect the Central Bank to keep the policy rate at its current level over the next year and reduce it to 6.25% over the medium term.

It was noted that amid the risks discussed and the existing uncertainties, the CBA Board, on the one hand, considered Case A-type scenarios related to stronger demand conditions in the domestic economy, further expansion of external demand, and risks of rising inflation expectations, which require a higher policy rate path compared with market expectations.

Case B-type scenarios were also discussed, related to the prospect of slower global economic growth, the emergence of disinflationary risks resulting from restrictions on exports to Russia, and a fundamental decline in Armenia’s risk premium, which imply a lower policy rate path compared with market expectations.

As a result, emphasizing the need to manage the macroeconomic effects stemming from Case A-type scenarios, the Board of the Central Bank of the Republic of Armenia decided to raise the policy rate by 0.25 percentage points, setting it at 6.75%.

The Board will continue to monitor economic development scenarios and stands ready to take appropriate action to ensure the 3% inflation target and price stability over the medium term.