Armenia: Central Bank cuts policy rate as expected, further easing on the cards
CAUCASUS / CENTRAL ASIA
- In Brief
01 Aug 2023
by Ivan Tchakarov
The Central Bank of Armenia cut the policy rate by 25bpts to 10.25 percent. This is the second cut since the earlier 25bpt move on Jun 13th. The decision now establishes a path in the easing cycle that we anticipate will bring the refinancing rate to 8.50-9.00 percent by the end of the year. The decision was mainly driven by fast-decelerating headline inflation. Inflation had been inching up since early 2020, increasing from just about zero to 10.3 percent YoY in Jun 2022 (Graphs 1 and 2). The initial surge in inflation was driven by food prices, but the focus has shifted to nonfood and services inflation over the course of 2022/2023. Price growth has since lost momentum as food inflation moderated, currency appreciated, and high base effects kicked in. The CPI has consequently fallen to only 1.3 percent YoY in May and further to -0.5 percent YoY in Jun driven primarily by food inflation, which declined by 4.1 percent YoY in Jun, and nonfood inflation, which increased by a mere 0.3 percent YoY. At the same time, services inflation is still growing at 4.0 percent YoY. We anticipate that inflation will start inching up in the second half of the year, approaching but not reaching the 4.0 percent CPI target by the end of 2023. Graph 1 Armenia is now going through powerful disinflation Source: Central Bank of Armenia, Author's calculations. Graph 2 Food prices are providing a strong fillip to the decline in inflation Source: Central Bank of Armenia, Author's calculations. There is more scope to continue cutting, but the easing process will be very gradual as macroeconomic and geopolitical risks abound. Monetary authorities are likely to remain vigilant about existing inflat...
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