Why did the Central Bank of Armenia lower the refinancing rate?

The Central Bank of Armenia recently revised the refinancing rate, lowering it by 0.25 percentage points. The base rate now stands at 6.5%.

Considering that this was the first rate cut since February of this year, let’s try to understand what the Central Bank’s actions may indicate. The Bank itself explains this move as a balancing act between two possible scenarios: excessive demand and weakening demand. As a result, the Central Bank reduced the interest rate, partly meeting market expectations.

To put it simply, the consumer price index—the average measure of inflation—is currently within the established target range. This has generated expectations of monetary policy easing by the Central Bank, meaning a reduction in interest rates.

The Bank took this step very cautiously, lowering the rate by only 0.25 percentage points, which suggests that inflationary risks still exist. Incidentally, the Eurasian Development Bank (EDB) has expressed a similar view.

To make it clearer, the refinancing rate is the Central Bank’s tool for managing inflation. Raising it increases the cost of money, which somewhat suppresses demand. Lower demand, in turn, leads to lower prices. Conversely, lowering interest rates has the opposite effect on the economy. The question arises: has Armenia truly overcome inflation?

We’re not talking about the average consumer price index, but about specific essential goods and services. Of course, the situation has not improved, and we are witnessing a serious rise in prices. This explains why the Central Bank resorted to such a cautious reduction. But wouldn’t it have been better this time to leave the interest rate unchanged?

A high refinancing rate has a negative impact on economic growth. Therefore, perhaps the Central Bank is taking this step in an attempt to support economic growth in the near future. If so, what is the source of the Bank’s concern, given that Armenia has already recorded high economic activity?

The problem is that these high growth rates are based solely on temporary factors. Today, the drivers of economic growth are construction and the service sector, which by their nature are temporary. The Central Bank itself, in its assessments of economic growth, emphasizes the importance of non-structural factors in shaping growth.

Therefore, it is possible that through this step, the Bank is trying to help preserve weak economic growth in the future.