Armenia’s central bank cut its rate for the third time this year and said it will be necessary to maintain stimulus in the medium term as inflation is expected to remain low due to a deflationary drag on the country’s economy from abroad and inflation is only expected to approach its target at the end of the forecast horizon.
The Central Bank of Armenia (CBA) cut its rate by 50 basis points to 4.50 percent and has now cut it 100 points this year following cuts in March and April.
CBA has been gradually lowering its key rate since August 2015 when the rate was 10.50 percent. The rate was initially lowered by 450 basis points in 12 steps until February 2017 when it was kept steady at 6.0 percent for almost two years.
But in January 2019 CBA returned to the easing path and since then the rate has been cut five times by 150 basis points.
CBA said the decline in economic activity in the second quarter will deepen due to both supply and demand factors and despite the impact of fiscal policy, the impact of declining private demand will prevail, largely due to the uncertainty surrounding the Covid-19 pandemic.
Given the slow recovery in both external and domestic demand, the current low inflationary environment and the negative impact of high uncertainty, CBA’s board said it considered it appropriate to further reduce its refinancing rate today.
“The board also considers that in the current situation, along with the promotion of monetary policy, the implementation of more fiscal stimulus is key to restoring aggregate demand,” CBA said, adding the recovery of the world economy is estimated to be slower than expected as uncertainty over the future course of the contagion continues.
At the same time, CBA said prices of raw materials are showing some signs of stabilization and recovery due to the cautiously optimistic expectations of a recovery of China’s economy.
Inflation in Armenia rose to 1.2 percent in May from 0.9 percent in April, well below CBA’s target of 4.0 percent, plus/minus 1.5 percentage point.
Today’s rate cut was the first under its new president, Martin Galstyan, who this week took over from Artur Javadyan.