The Board meeting opened with presentation of the Situation Report as of October 29, 2019. It addressed current developments on inflation, external environment and real, fiscal and monetary sectors of the economy.
There was 0.2% deflation in September 2019 compared to that of 0.3% registered in the same month last year, and the 12-month inflation rate remained almost unchanged, 0.5% at the end of the month. As in previous months, lower seasonal prices of agricultural products in September continued contributing largely to the low inflation. In particular, prices in items “Vegetable” and “Fruit” posted decreases by 4.0% and 1.9%, respectively (combined contribution to inflation: -0.3 pp), in line with prices in items “Fats and oils”, “Dairy products”, “Sugar” and “Meat” having dropped by 5.8%, 1.8%, 1.7%, and 1.2%, respectively (combined contribution to inflation: -0.37 pp), which mainly has incurred the impact of reduction of prices of such products in the international food products market. During the month, the 12-month core inflation rate somewhat decreased, however it remained at the 1.1% level, running above headline inflation.
Addressing the current economic situation, the Board stated that economic activity remained strong over the third quarter of 2019 owing mainly to the productivity growth. Thus, a 7.1% economic activity indicator was registered in January-September, as compared to the same period of the previous year, which was strongly supported by high growth of services and industry. Domestic demand too remains high thanks to the increase in private consumption, which was driven by a stimulative monetary policy implemented in recent years and, in part, by a large-scale dram liquidity injected using other macro-prudential instruments this year. Particularly, a change in the reserve requirement ratio by the Central Bank made in earlier part of the year provided for a mechanism allowing reserves to be kept in foreign currency, rather than in Armenian dram, against attracted foreign currency funds (a change of 2% three times this year), as a result of which about AMD 120.0 billion-worth liquidity has been spared for the banking system. On the other hand, amid a large foreign currency supply, foreign currency equivalent to about AMD 240.0 billion was bought from the market. The growth of banking sector lending to the economy remains high which is more noticeable in consumer and mortgage loan markets. The fiscal policy implemented in terms of impact on domestic demand during the mentioned period remains contractionary, despite some deficit allowed by the budget in the third quarter.
Developments in the external sector were presented at the Board meeting, with reference to persisting uncertainties and trends of slowing growth in the global economy derived from such uncertainties, which comes also in line with continued weakening of the inflationary environment in the world’s commodity markets. In such a circumstance, central banks of main trade partner countries to Armenia will continue pursuing, in an upcoming period of time, a stimulative monetary policy in order to fulfil their inflation targets.
The Board touched upon the developments in the domestic financial market; short-term interest rates in the financial market in September-October, in line with a policy rate cut in September, have fallen, keeping close to the policy rate. At the same time, the government bond market reacted to the reduced policy rate by posting a decline in interest rates along the entire yield curve.
Following presentation of the Situation Report and the developments in external and domestic macroeconomic environments, the Board began addressing the monetary policy directions and making decision on the interest rate. The options whether the refinancing rate is to be left unchanged or reduced were discussed. In view of the developments in the external sector in the near future and the fiscal policy’s expansionary pace, and preferring a gradual recovery of inflation, the Central Bank’s Board found it appropriate to retain the monetary stimulus by leaving the refinancing rate unchanged. Given the predictable macroeconomic developments, the Board estimates that monetary conditions need to be kept expansionary over a medium term too, in fulfillment of the inflation target. As a result, the expectation is that the inflation will run below the target in the coming months but will later stabilize around it.
The Board also looked to current inflation risks. The risks to the inflation deviating from projection are still on a downward path and depend on the developments in the external environment and the pace of the fiscal policy. If they materialize, an appropriate monetary policy response of the Central Bank will come along to ensure price stability in the medium term.
The Board approved the decision on interest rates of monetary instruments of the Central Bank and the proposed press release, which are attached hereto.
Deciding on the Interest Rate
050.0167 L. 29.10.19
October 29, 2019
No. 167 L
Interest Rates of Operations by the Central Bank of the Republic of Armenia in the Financial Market
By virtue of Article 20 (c) of the Republic of Armenia Law on the Central Bank, the Board of the Central Bank of the Republic of Armenia enacts:
1. Leave the refinancing rate of the Central Bank of the Republic of Armenia unchanged, at 5.5%.
2. To the Financial Department of the Central Bank of the Republic of Armenia to carry out operations in the financial market of the Republic of Armenia, using the interest rates, as follows:
2.1 Lombard facility rate offered by the Central Bank to be 7.0%.
2.2. Deposit facility rate offered by the Central Bank to be 4.0%.
3. This decision shall take force in the manner prescribed by law.
Governor of the Central Bank
October 29, 2019
In the October 29, 2019 meeting the Board of the Central Bank of Armenia decided to leave the refinancing rate unchanged, at 5.5%.
There was 0.2% inflation in September of 2019 compared to that of 0.3% registered in the same period of the previous year, and the 12-month inflation rate remained almost unaltered, reaching 0.5% at the end of the month. Core inflation continues to run above headline inflation, amounting to up 1.1%.
In the external sector, the slowing of global economic growth is persisting and the trend is noticeable in world commodity markets as well. Central banks of main partner countries to Armenia are further prone to easing monetary conditions. The Board of the Central Bank estimates that inflationary pressures from the external sector are not expected.
The Board admits that economic activity in Armenia remained high in the third quarter, as was projected, thanks to the productivity growth. Domestic demand also remained strong over the quarter, driven by increased private consumption, which continues to be sustained by the monetary policy’s stimulative stance and largely injected dram liquidity. At the same time, notwithstanding a slightly expanded effect in the third quarter, the fiscal policy’s impact on aggregate demand is still estimated to be contractionary since the beginning of the year.
Given the developments in the external environment and the stance of the fiscal policy, and in view of further preference to a gradual recovery of inflation, the Board of the Central Bank finds it reasonable to keep the monetary stimulus under current terms by leaving the refinancing rate unchanged. The Board also finds that in view of anticipated macroeconomic developments, keeping the policy stance expansionary in the medium run will be needed in order to fulfil the inflation target. As a result, the expectation is that the inflation will run below the target in the coming months but will return to the target in the mid-term perspective.
At present, downside risks to inflation deviating from the projection path are prevailing and mainly depend on the developments in the external sector. In the event such risks materialize, the Central Bank will respond adequately while maintaining price stability in the medium run.
Detailed information that underlies the decision on setting the interest rate will be available in Press Release (Minutes on Interest Rate) to be published by November 12, 2019.
Press Service of the Central Bank of Armenia