Armenia holds rate, still expects to maintain easy policy

December 26, 2018

By CentralBankNews.info
       Armenia’s central bank left its benchmark refinancing rate at 6.0 percent and said expansionary monetary conditions will be needed for a longer period of time to maintain price stability as inflation is expected to be below the lower end of its target range before stabilizing around the 4.0 percent midpoint target by the end of the forecast horizon.
     The Central Bank of Armenia’s (CBA) guidance confirms its shift toward a dovish stance in November this year when it moved away from a tightening bias that had been in place since November 2017.
      Between August 2015 and February 2017 the CBA cut its key rate 12 times and by a total of 450 basis points.
      CBA noted the inflation rate eased to 1.8 percent in November from 2.8 percent in October due to lower prices of seasonal goods and the central bank said it expects no inflationary pressures from the external sector in coming months.
      CBA targets inflation of 4.0 percent, plus/minus 1.5 percentage points, and said the risks of meeting its inflation target by the end of the forecast horizon, normally two years, is still assessed to be downward.
      “However, should there be risks to the inflation and economic growth outlook deviating from the prediction scenario, the CBA will adjust the monetary policy directions accordingly, while ensure the price stability,” the central bank said.
        Aggregate demand was relatively weak during the second half of the year due to a persistent contraction of fiscal policy and weaker private spending, CBA said, adding low inflation was helping maintain real purchasing power and anchoring inflation expectations.
      Armenia’s gross domestic product grew by an annual 2.7 percent in the third quarter, down from 7.5 percent in the second quarter.

      The Central Bank of Armenia issued the following statement:
   
   

“In the December 25, 2018 meeting, the Board of the Central Bank of Armenia (CBA) decided to leave the refinancing rate unchanged: at the level of 6.0%.
 
There was 1.0% inflation in November of 2018 against that of 2.0% registered in the same month of the previous year, which was mainly due to a relatively low growth of prices of seasonal products. In this circumstance, the 12-month inflation rate has reduced to 1.8% at the end of the month. The core inflation rate has also slowed down to some extent. The Board of the CBA estimates that the inflation environment will remain low in the upcoming months and the 12-month inflation rate will be running slightly below the lower part of the confidence band.
 
Global economic growth trends continued evolving in line with the forecasts, under which the central banks of leading countries further tightened their monetary policy conditions. This was concomitant with weakening of the inflation environment in the international markets of basic commodities, and the Board of the CBA considers that no inflationary pressures from the external sector are likely in the coming months.
 
The Board notes that aggregate demand remained relatively weak over the second half of the year due to persisting contractionary stance of the fiscal policy and some weakening of private spending.  On the other hand, the low inflation environment amid sluggish private consumption growth rates has contributed to maintaining the real purchasing power and anchoring the inflationary expectations in the country.  
 
In the situation described above, the Board of the CBA finds it appropriate to keep the refinancing rate at the current level which is estimated to be more expansionary, taking into account the interest rate rise in partner countries. At the same time, in view of the anticipated macroeconomic developments, to leave monetary conditions expansionary for a longer period of time will be needed for maintaining price stability in the medium run. As a result, the expectation is that inflation will still be running below the lower part of the confidence band and stabilizing around the 4% value at the end of forecast horizon.     
 
Risks to fulfillment of the inflation target at the end of forecast horizon are still assessed to be downward, due to external and internal factors. However, should there be risks to the inflation and economic growth outlook deviating from the prediction scenario, the CBA will adjust the monetary policy directions accordingly, while ensuring the price stability.”