History and Evolution of Monetary Policy in Armenia
This subsection outlines the early history and evolution of the Armenian monetary policy. It covers the introduction of the Armenian dram in 1993, the adoption of monetary aggregate targeting by the Central Bank of Armenia (CBA), and the shift to inflation targeting in 2006. It concludes with the introduction of the FPAS Mark II framework in 2024 and the reduction of the inflation target to 3% in 2025.
Early History: Introduction of Armenian Dram and Monetary Aggregate Targeting
In 1993, following the dissolution of the ruble area, the Armenian national currency, the dram, was introduced, and the Central Bank of Armenia began implementing independent monetary policy. The first "Law on the Central Bank of Armenia," adopted that year, highlighted the establishment of the national currency and external stability as key priorities, but did not set a primary objective for the central bank. The dram was introduced on November 23, 1993, after most other former Soviet republics had already adopted their own currencies. During this time, the influx of rubles into Armenia, as other post-Soviet countries stopped accepting the Ruble, led to rapid price growth and hyperinflation, with the CPI reaching 11,000% in 1993.
In 1994, the CBA adopted monetary aggregate targeting and developed its first monetary policy strategy, alongside a free-floating exchange rate policy, with FX interventions limited to indirect instruments. This approach was solidified in 1996 with a revised law that established price stability as the CBA's primary objective and outlined the use of indirect instruments, central bank independence, and operational accountability, along with strict limitations on CBA loans to the government. From 1994 to 2005, the CBA's monetary aggregate targeting strategy helped achieve macroeconomic stability by reducing and stabilizing inflation. Inflation became manageable in late 1994, though it stood at 1761% by year-end. In 1995, economic activity grew by 5.7%, and inflation dropped to 32.2%. Between 1995 and 1998, inflation gradually stabilized, averaging 4.3% annually, marking the transition to a low inflation environment.
Adoption of Inflation Targeting
In 2003, the CBA presented its development vision, which included adopting inflation targeting. After two years of research, the CBA chose "inflation targeting-lite" due to frequent external and domestic shocks, financial instability, underdeveloped financial markets, high dollarization, and trade term volatility. In this context, the operational objective was defined as being both money supply as well as the policy rate, while FX interventions were frequently used. On January 1, 2006, the CBA adopted a full-fledged inflation targeting regime, with the 7-day repo rate as the operational objective, a 4% inflation target, and a +/- 1.5% tolerance band. This introduced a more holistic, forward-looking policymaking framework focused on monitoring inflation expectations within a Forecasting and Policy Analysis System (FPAS Mark I). Beginning on April 9, 2018, the CBA’s primary objective was expanded to include both price stability and financial stability.
Since adopting inflation targeting and the FPAS Mark I framework, between 2006 and 2023, the CBA has dealt with a successive layering of crises and shocks, including the 2008-2009 Global Financial Crisis; the 2014-2015 regional economic-financial crisis; the 2020 Covid-19 crisis; the 2020 Nagorno-Karabakh War; the 2021 sharpening of the Russia-Ukraine conflict; the 2023 war in Nagorno-Karabakh; as well as a number of challenges emanating from various regional and global developments during this time. In this context, whether from the perspective of managing monetary or financial market risks, uncertainty has meaningfully risen, creating greater volatility in inflation, interest rates, and exchange rates. Given all this, between 2006 and 2023, the prudent policy actions of the CBA within the inflation targeting and FPAS framework have allowed annual inflation to average around 4.2%, which is in line with the stated 4% target of inflation that is consistent with price stability.
In 2024, recognizing the need to adopt systematic approaches to managing increasing risk and uncertainty, the Central Bank of Armenia designed and introduced a novel and innovative prudent risk management framework for price stability, known as FPAS Mark II. In 2025, the Central Bank reduced the inflation target to 3%, down from the previous target of 4%. This adjustment reflects recent developments and achievements in Armenia’s economy and monetary policymaking framework, providing a solid foundation for the Central Bank to continue strengthening public confidence in monetary policy, developing the policy framework, and implementing long-term reforms. The decision to set a lower inflation target better aligns with the perception of true price stability and the current structure of the financial and economic system. The 2025 Budget Law states that the Central Bank of Armenia should be guided by a year-over-year CPI inflation target of 3%, with a variation band of ±1.0 percentage points, when making monetary policy decisions.