Armenian Central Bank Starts Rate-Cutting Cycle

CAUCASUS / CENTRAL ASIA - In Brief 13 Jun 2023 by Ivan Tchakarov

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The Central Bank of Armenia (CBA) cut the refinancing rate by 25bpts to 10.50 percent on Jun 13th. This is the first cut since Sep 2020 and now sets monetary policy on an easing path that we anticipate will bring the refinancing rate to 8.50-9.00 percent by year-end. The Central Bank of Armenia reached the end of the hiking cycle in Dec 2022 and was poised to transition into easing in line with fast-decelerating inflation. The CBA hiked the refinancing rate from 4.25 percent in Dec 2020 to 10.75 percent in Dec 2022, reflecting elevated levels of inflation. It kept the policy rate unchanged at that level in the previous three policy meetings, shifting gradually to a broadly balanced assessment of underlying inflation risks. The recent sizable downshift in headline inflation provided the right stimulus for the CBA to gingerly transition to easing, although this will most likely be done in a very gradual manner given the still very robust GDP growth rates. Inflation has dropped sharply below the 4 percent target but is set to accelerate slightly in the second half of the year. 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. Price growth has since lost momentum as food inflation moderated, the currency appreciated, and high base effects kicked in. The CPI has consequently fallen to only 1.3 percent YoY in May driven primarily by food inflation, which fell by 0.4 percent YoY, and nonfood inflation, which increased by 1.1 percent YoY. At the same time, s...