The Central Bank of Armenia’s decision to raise the refinancing rate by 0.25 percentage points was driven by inflationary risks in the economy. Former Finance Minister Vardan Aramyan said this, noting that he fully agreed with the CBA’s decision and had warned several months earlier that the Central Bank would inevitably have to tighten monetary conditions.
Imported Inflation
According to Aramyan, Armenia’s economy is being affected simultaneously by two different inflationary processes. The first is imported inflation. Rising prices for energy and other goods on international markets are also being transmitted to the Armenian economy. Petrol and diesel prices, for example, depend on external factors over which Armenia has no direct influence.
Against this background, ongoing conflicts around the world are creating additional uncertainty in energy markets. According to Aramyan, the price of oil has already exceeded $100, while uncertainty remains. At the same time, attacks on energy infrastructure could reduce refining and fuel production volumes, placing additional pressure on prices.
The economist said that in the case of such supply-side inflation, the Central Bank cannot directly eliminate its root cause. If a producer’s costs rise, for example because of higher fuel prices, the producer is forced to reflect this to some extent in the price of the product. However, the CBA must respond when externally driven inflation begins to shape inflation expectations and produces a chain reaction throughout the economy.
A Large Inflow of Money into Armenia’s Economy
Aramyan believes that another important factor for Armenia is the large inflow of money from abroad. According to him, if the amount of money in the economy increases rapidly while the supply of goods and services does not grow at the same pace, inflationary pressure emerges. This concerns not only consumer goods and services but also asset prices.
Aramyan cited the real estate market as one indicator of this trend, noting that property prices are rising very rapidly. Under these conditions, the CBA’s instrument is the tightening of monetary conditions, and it was precisely this reasoning that led to the decision to raise the refinancing rate by 0.25 percentage points.
A Signal of Readiness to Take Tougher Measures
According to Aramyan, an increase of 0.25 percentage points does not mean that interest rates on all loans will rise by the same amount. Its impact primarily concerns floating-rate loans, including mortgages whose interest rates are linked to the CBA’s refinancing rate. The effect on fixed-rate loans will not be as direct.
At the same time, Aramyan said the CBA’s decision signals to the financial market that if the current inflationary scenario continues, the Central Bank is prepared to take tougher steps. “They will take tougher measures if this scenario continues,” Aramyan said.
He also drew attention to the fact that the structure of Armenia’s loan portfolio is sensitive to changes in interest rates.
According to him, as of July, the banking system’s loan portfolio amounted to AMD 8.8 trillion, with consumer loans accounting for 23%. Meanwhile, industry and agriculture together accounted for only 13%.
“Consumer loans are almost twice as large,” the former minister said.
According to him, this structure means that even a relatively small change of 0.25 percentage points in the refinancing rate could have a considerably more noticeable impact on the public.