Armenia’s central bank lowered its key interest rate for the fourth time this year and said it was leaning toward continuing monetary stimulus in the medium term due to the low rate of low inflation and a delay in a recovery of domestic and international demand.
The Central Bank of Armenia (CBA) cut its benchmark refinancing rate by another 25 basis points to 4.25 percent and has now cut it by 125 points this year following earlier cuts in March, April and June.
CBA has been gradually lowering its refinancing rate since August 2015 when the rate was 10.50 percent. Initially, the rate was cut by 450 basis points in 12 steps until February 2017, when it was kept unchanged for almost two years.
But in January 2019 CBA returned to the easing path and since then the rate has been cut six times by a total of 175 basis points.
Although the the world economy is recovering from measures to contain the COVID-19 pandemic, CBA said there is still a high degree of uncertainty related to fully overcoming the pandemic and this will significantly restrain and delay the complete recovery of demand and economic activity in Armenia’s main trading partners.
Under those conditions, these countries will continue to pursue monetary stimulus with the result the board of CBA does not expect the external sector to have any inflationary impact on Armenia’s economy.
Armenia’s inflation rate rose to 1.8 percent in August from 1.5 percent in July and although it is expected to gradually rise and average around 2.5 percent this year it will first stabilize around the target at the end of the forecast horizon as domestic demand and economic activity recovers at a slower-than-expected pace.
CBA targets inflation of 4.0 percent, plus/minus 1.5 percentage points.
Armenia’s gross domestic product contracted by an annual 13.7 percent in the second quarter after expanding by 3.9 percent in the first quarter, in line with CBA’s forecast, and in July economic activity was below expectations due to a decline in the services sector.
The central bank’s board said it remains convinced more fiscal stimulus is key to restoring overall domestic demand in addition to monetary stimulus because different sectors have suffered disproportionate losses and monetary policy has more of an overall impact.
It added the risks of inflation deviating from its forecast is largely balanced but in the event it deviates, it is ready to respond accordingly to ensure price stability.
CBA raised its forecast for the economy to contract by 6.2 percent this year, up from an earlier forecast of 4.0 percent, and expects growth in 2021 of 4 – 5 percent after growth of 7.6 percent in 2019.