Armenia: Central Bank makes a bolder move, cuts refinancing rate by 50bpts to 9.75 percent

CAUCASUS / CENTRAL ASIA - In Brief 12 Sep 2023 by Ivan Tchakarov

---

This week is big for monetary policy in the CCA region. Three central banks hold meetings this week, starting today with Armenia and moving on Sep 13th to Georgia and Sep 13th to Uzbekistan. These decisions will be the focus of CCA Weekly on Friday, Sep 15th, but here we only share our initial take on the rate moves. The Central Bank of Armenia has taken a bolder move with the 50bpts cut given the favorable inflation backdrop. This is the third decrease since the start of the rate-cutting cycle in Jun when the central bank first reduced the policy rate from 10.75 percent to 10.50 percent. It was followed by another small 25bpt step to 10.25 percent in Aug. This more cautious approach has now transitioned to a bolder 50bpt move to 9.75 percent, which has been driven, in our view, by the recent evolution of price growth. In particular, deflation has set in in the last three months to Aug, pointing to subdued underlying price pressures. Food and nonfood prices are chiefly driving this result, with services inflation still providing some headwinds to inflation.  There should be more scope for rate cuts into year-end and beyond. The confluence of well-behaved inflation and decelerating GDP growth is arguing for a continuation of the rate-cutting cycle. We forecast the refinancing rate at 9.0 percent and 7.5 percent at the end of 2023 and 2024, respectively. The accompanying statement has not yet been released and we will assess it in the Weekly on Fri, but we anticipate that the central bank has modified the underlying message to a more dovish tone.