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Central Bank Policy in Armenia Favors Banks but Hurts Local Producers, Expert Says

Bank
Arshaluis Mgdesyan
30.10.24 19:45
18

The Central Bank of Armenia’s recent cut in its key interest rate to 7.25% amid zero inflation is unlikely to reduce loan costs for businesses and households. This current monetary policy may instead pose significant risks to the national economy, argues economist Suren Parsyan.

In an interview with BMG, Parsyan highlighted the unusual situation: while the Armenian Central Bank is lowering rates, Russia's Central Bank has taken an unprecedented step, raising its rate to 21%. "Russia is experiencing high inflation, with the ruble losing value, while the Armenian dram is strengthening under external influences," he explained.

According to Parsyan, both high and low inflation present serious challenges for society and businesses. “Unfortunately, due to the miscalculated monetary policy of Armenia’s Central Bank, local producers are bearing the burden, while the banking system accumulates substantial profits. Meanwhile, the Armenian government has largely remained a bystander,” the economist emphasized.

Parsian’s concerns are reflected in official statistics: despite the Central Bank’s reduction of the key rate from 10.75% to 7.25%, dram-denominated loan interest rates rose to 13.37% in August 2024, up from 12.33% a year earlier.

Central Bank Governor Martin Galstyan attributes the situation to strong demand for loans. He notes that the demand for consumer and mortgage loans has surged due to Armenia’s high economic growth over the past three years and strong external demand.

“The country’s risk-free rate is around 9.5%. Long-term loan products cannot be priced below this level, as it would make government bonds more attractive than corporate or retail lending,” explained Galstyan.

On October 29, the Central Bank’s Board reduced the refinancing rate by 0.25 percentage points to 7.25%. The regulator also set the lombard repo rate at 8.75% and the deposit rate at 5.75%.

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