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At its meeting on Tuesday, the Board of the Central Bank of Armenia (CBA) decided to decrease the key policy rate (refinancing rate) by 0.25 percentage points, setting it at 7 percent. The Board agrees that a lower refinancing rate is necessary to continue to meet its price stability objective of ensuring an inflation rate of 4 percent over the medium term.

"Annual CPI inflation has continued to remain below the target, registering 1.4% in November 2024. Core inflation has also remained at low levels, at 0.6% year-over-year in October," CBA Governor Martin Galstyan said, presenting its monetary policy statement.

"In Q4 2024, risks of slowing economic growth globally and in the key trading partner countries of Armenia continue to persist. Global inflation continues to slow; however, sticky prices in key trading partner economies continue to remain relatively elevated. Persistent geopolitical uncertainties, as well as growing tensions in international trade relations, continue to create risks for future growth in global commodity prices and potential disruptions in global supply chains. At the same time, labor market conditions in key trading partner countries, particularly the United States, remain tight, despite some recent easing. Conversely, uncertainty about the scale of impacts of fiscal policy on aggregate demand conditions in the US, as well as about long-term interest rates, has significantly risen. In this context, advanced economy central banks would be expected to continue to gradually ease policy rates in the near term, while still maintaining a relatively tight stance. Consequently, the external environment would be expected to transmit weak inflationary pressures on the Armenian economy, while embodying some upside risks.

Economic activity in Armenia continue to approach its stable, long-term levels. Growth in economic activity has largely been driven by construction, services and trade. These dynamics continue to be impacted by certain short-term factors, posing significant uncertainty with respect to the sustainability of economic growth and its long-term outlook, as well as the future trajectory of domestic demand and consumption conditions. In this context, external demand for domestic services continues to adjust. Labor market conditions continue to somewhat cool amid these conditions, as reflected in stabilizing wage growth, non-traded sticky price inflation, and inflation expectations. At the same time, risks for additional demand pressures stemming from fiscal policy persist.

In order to manage possible risks stemming from conditions of high uncertainty, the Board considers multiple scenarios during its deliberations. On the one hand, the Board discussed scenarios where possible underlying developments would require a higher path for the policy rate relative to current market expectations. These Case A-type scenarios include uncertainty about the formation and persistence of excess demand conditions in the domestic economy, as well as uncertainty about long-term interest rates. These developments would require a tighter policy response compared to market expectations in order to ensure price stability. On the other hand, the Board discussed Case B-type scenarios, including those related to the gradual slowdown of the construction sector, weakening demand, and risks associated with the prolonged maintenance of a low inflation environment. This would imply a more rapid and aggressive downward path for the policy rate than what is currently priced in markets in order to sustainably stabilize inflation at the target in the medium-term horizon.

While the Board believes that there is a greater likelihood of Case B-type scenarios materializing, it emphasizes the importance of minimizing the losses that could stem from the Case A-type risks. The Board thus finds it appropriate to continue to gradually ease the policy stance. The Board resolutely affirms its commitment to adopting the appropriate policy actions and strategy to ensure the price stability objective of 4% inflation in the medium term," reads the statement.