Armenia raises policy rate as demand fuels inflation

By Arshaluys Mghdesyan

Armenia’s Central Bank raised its policy rate by 25 basis points to 6.75% on Sept. 15, its first increase in nearly four years, saying stronger domestic and external demand was adding to inflationary pressure.

The rate had remained at 6.5% since December 2025. Annual inflation reached 4.4% in August, above the Central Bank’s 3% target, while core inflation — which excludes volatile items — rose to 4.8%.

Central Bank Governor Martin Galstyan said the decision followed a difficult board meeting. Four members supported keeping the rate unchanged and four, including Galstyan, supported an increase.

In its Executive Monetary Policy Statement released on Sept. 15, the Central Bank said Armenia’s economic growth accelerated to 6.7% year-on-year in the second quarter, running above its long-term sustainable level.

Construction and services were the main drivers of growth, the bank said. Strong imports of consumer goods and retail turnover also indicated excess demand in the economy.

The Central Bank said a significant increase in visits to Armenia was creating additional external demand and raising the risk of faster wage growth and service-sector inflation. It noted that a recent increase in housing rents had contributed to higher prices for goods and services that tend to change slowly.

Galstyan said the bank was looking beyond conventional tourism statistics, which have recently weakened, to people arriving in Armenia and remaining for longer periods.

“The main difference is that people come and stay,” he said. “That creates continuing demand.”

The Central Bank said inflationary pressure had become more broad-based. Earlier in the year, price growth was largely associated with supply-side factors, including poor harvests, global commodity-price volatility and disruptions to trade routes. It now sees stronger demand as a more important source of inflation, particularly in services.

The bank also warned of countervailing risks from restrictions on exports of Armenian-origin products to Russia. It said prolonged restrictions could lower export revenue, create excess supply in the domestic market and weaken consumer and investment activity.

Agricultural output fell 15.3% year-on-year in the second quarter, reducing overall economic growth by around one percentage point, according to the report. The Central Bank linked the decline to adverse weather and export restrictions to Russia.

Higher policy rates are intended to curb inflation by making borrowing more expensive over time and cooling demand. Galstyan said a future rate cut would require a negative output gap, meaning that economic activity would need to fall below the level Armenia can sustainably produce, easing demand and inflationary pressure.

Armenia’s economy grew 6% in the first half of 2026, above the government’s 5.6% growth target for the full year.