History of monetary policy
Formation of Armenia’s Monetary Policy
The introduction of the Armenian dram marked a significant step in the country’s economic independence. Around this time as post-Soviet nations moved to their own currencies Armenia faced hyperinflation, with CPI inflation reaching 11,000% in 1993. To stabilize the economy, the Central Bank of Armenia adopted monetary aggregate targeting in 1994, formalized in the 1996 Central Bank Law, which prioritized price stability and reinforced CBA’s independence, accountability, and restrictions on government borrowing. The CBA also adopted a free-floating exchange rate policy, limiting direct foreign exchange interventions. In 1999, new monetary policy mechanisms were introduced to improve effectiveness and align with international best practices, further strengthening Armenia’s financial system and ensuring economic resilience.
Monetary Reform and Inflation Control
Between 1994 and 2005, the Central Bank successfully reduced inflation volatility, achieving long-term price stability. Inflation, which stood at 1,761% in 1994, dropped significantly to 32.2% in 1995 and stabilized at an average 4.3% between 1995 and 1998. Recognizing the need for a more forward-looking policy framework, the Central Bank began transitioning to an inflation-targeting approach in 2003. After two years of research and adaptation, inflation targeting-lite was introduced to accommodate Armenia’s economic challenges, including dollarization, external shocks, and underdeveloped financial markets. On January 1, 2006, Armenia officially adopted a full-fledged inflation-targeting regime, setting a 4% inflation target with a +/- 1.5% tolerance band. The 7-day repo rate became the key operational instrument, and the Forecasting and Policy Analysis System (FPAS Mark I) was established to enhance transparency and policy efficiency.
Managing Inflation and Financial Stability Through Crisis
Since 2006, the Central Bank has faced multiple global and regional crises, including the 2008-2009 Global Financial Crisis, the 2014-2015 regional economic downturn, the 2020 Covid-19 crisis, the Nagorno-Karabakh conflicts, and the 2021 Russia-Ukraine war. These events increased economic uncertainty, contributing to volatility in inflation, interest rates, and exchange rates. Despite these challenges, the adoption of FPAS, inflation targeting, and prudent policy measures has allowed the Central Bank to maintain long-term price stability, with average annual inflation remaining close to its 4% target. The 2018 expansion of the Central Bank’s mandate to include both price stability and financial stability further strengthened Armenia’s monetary policy framework, reinforcing the resilience of the financial system amid ongoing global uncertainties.
Advancing the Frontiers of Monetary Policy
Since 2021, the Central Bank of Armenia (CBA) has adopted a policy of implementing innovative monetary policy models to further develop and enhance the financial system beyond its previous state.
With FPAS Mark II, the CBA is the first central bank to fully develop and adopt risk management as a systematic approach to monetary policymaking. Since the introduction of FPAS Mark II framework, central banks in many countries, including the National Bank of Georgia, have taken steps to implement its core aspects and/or individual elements. At the same time, several advanced central banks, such as the Bank of England and the Bank of Canada, have emphasized the need to manage risks and uncertainties in the process of monetary policymaking. Their visions largely align with the principles and elements of FPAS Mark II system.
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