Armenia's central bank says export headwinds cloud strong economic growth

By Lia Avagyan

Armenia's Central Bank left its policy rate unchanged at 6.5% on Tuesday, saying the economy continues to expand on the back of strong domestic demand and tourism, but warning that inflation remains above target and external risks have intensified.

The central bank's Monetary Policy Report was presented by Deputy Governor Hovhannes Khachatryan at a press conference in Yerevan on Aug. 4, following the Central Bank Board's decision to keep the refinancing rate unchanged.

Annual inflation stood at 5.1% in June, well above the Central Bank's 3% target, while core inflation reached 4.9%, according to the report. The central bank said inflation continues to be driven by both supply-side pressures and resilient domestic demand.

"The Central Bank Board decided to leave the policy rate unchanged at 6.50%," Khachatryan said while presenting the report. He added that the bank "will continue to monitor economic developments and stands ready to take appropriate action to ensure price stability and achieve the 3% inflation target over the medium term."

The report paints a mixed picture of Armenia's economy. While economic activity remains strong, supported by construction, services and growing visitor numbers, policymakers say the country's outlook has become increasingly dependent on developments beyond its borders.

The Central Bank said geopolitical uncertainty surrounding the Middle East conflict, elevated energy prices and disruptions to international trade routes have weakened the global economic outlook and increased inflation risks worldwide. Higher commodity and food prices, together with uncertainty over energy supplies, could further fuel inflation if regional tensions persist.

At the same time, Armenia's economy continues to benefit from robust domestic demand. Economic activity remained well above its long-term trend during the second quarter, supported by construction and services, while tourism continued to expand. Visitor arrivals increased by around 15% in the first half of the year, reaching historically high levels, according to the report.

The Central Bank said strong demand has contributed to faster wage growth in some sectors and continues to support inflation, even as private-sector wage growth and inflation expectations have become more stable.

However, officials warned that external headwinds are becoming a growing threat to the economy.

According to the report, problems in several export markets have already begun to weigh on manufacturing and exports. Trade disruptions linked to continuing tensions in the Middle East have affected logistics, while Russian import restrictions on several agricultural and processed food products have led to a sharp decline in production and exports in those sectors.

Also read: World Bank warns prolonged Russian restrictions could spill beyond trade

Khachatryan said these developments could reduce incomes and weaken consumer and investment activity if they persist.

"Problems that have emerged in some export markets have increased the risks of lower incomes in Armenia's economy and excess supply in certain products, creating predominantly disinflationary effects," he said while presenting the report.

The Central Bank said its policy decision reflects competing risks. On one hand, strong domestic demand and the possibility of higher global neutral interest rates could require tighter monetary policy. On the other, slowing global growth and export-related difficulties could create disinflationary pressures that would argue for lower rates.

For now, policymakers concluded that leaving the policy rate unchanged is the most appropriate course while closely monitoring how domestic demand, inflation and external risks evolve in the coming months.