TOPIC OF THE WEEK: Armenian central bank sticks to rate cuts, for now

CAUCASUS / CENTRAL ASIA - Report 14 Jun 2024 by Ivan Tchakarov

Against a background of robust economic activity but still subdued inflation, the central bank implemented its fourth rate cut this year, lowering the key refinancing rate by 25bpts to 8.00 percent. Cumulative cuts since the start of the easing cycle last May have now amounted to an impressive 275bpts.

Nevertheless, the path forward appears bumpier. While a range of economic models suggests that the monetary policy stance still appears tight, the model that the central bank itself is appealing to points to a less clear picture, whereby currently, policy is neither inflationary nor contractionary. There is also an emerging dichotomy in the rising chances of a peace deal with Azerbaijan and the increasing, albeit still relatively low, level of internal dissatisfaction with the modus operandi of PM Nikol Pashinyan. If it is any guide, the bond market is still assessing this dichotomy in a constructive way, thus possibly providing yet another reason to be bolder and stick with the easing momentum.

In our view, the scope for further easing appears limited. Even if inflation runs below the target this year, the closed output gap (according to the central bank) and GDP growth still running above potential are creating a backdrop against which some residual tightness may be welcome. This does not mean that policy makers would not cut further, but if they do, the margin remains very limited, in our view.

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