The Central Bank of Armenia (CBA) is preparing for a gradual reduction in the refinancing rate while assessing different scenarios due to increasing risks and economic uncertainties, according to its quarterly economic review.
The report indicates that market expectations for the refinancing rate have been revised downward, suggesting a gradual decline over the next eight decisions. However, the yield curve has shifted slightly upward following previous key rate decisions.
"This shift may be attributed to short-term factors, faster-than-expected growth in domestic public debt, sustained high demand for credit, and a slower-than-anticipated reduction in U.S. interest rates," the CBA noted.
The regulator highlighted a recent decrease in Armenia's country risk premium, which has fallen significantly below the long-term sustainable threshold defined by the nation’s fundamental indicators. Nevertheless, uncertainties remain regarding debt sustainability and geopolitical risks, including border tensions and regional developments.
Two Monetary Policy Scenarios
In response to these uncertainties, the CBA has outlined two monetary policy scenarios:
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Scenario A:
This scenario involves a higher rate trajectory compared to market expectations. It assumes that economic growth, driven primarily by domestic demand, will exceed potential levels. Accumulated private sector savings and robust credit growth could further accelerate private spending. -
Scenario B:
This scenario envisions a lower rate trajectory, accounting for uncertainties related to potential price adjustments in the primary real estate market due to a possible oversupply. "There are already signs of an impending slowdown in construction volumes, particularly in Yerevan," the report emphasizes.
If Scenario B materializes, the CBA is prepared for a sharper rate cut than currently anticipated by the market to stimulate demand and align inflation with the medium-term target.
Recent Policy Decision
On December 10, the Central Bank Board decided to reduce the refinancing rate by 0.25 percentage points to 7%. According to the CBA’s press service, the Lombard repo rate is set at 8.50%, while the deposit rate is established at 5.50%.
