YEREVAN, November 18. /ARKA/. The Central Bank of Armenia outlined the rationale and feasibility of lowering the inflation target to 3%.
Since January 1, 2006, the Central Bank of Armenia has been implementing monetary policy based on an inflation targeting strategy, one of the key components of which is setting a specific inflation target. Currently, the target for the Central Bank of Armenia is 4% inflation, with an acceptable range of ±1.5 percentage points.
As noted in the regulator’s study “Inflation Target in Armenia,” the reforms implemented in Armenia’s economy over the past decades, along with recent developments in the financial system and overall economy, have provided a solid foundation for the vision of the Central Bank and the government regarding long-term economic growth. This underscores the need to set an inflation target that aligns with the perception of true price stability.
Moreover, as noted in the report, following various economic shocks in the early 2000s, the mitigation of key factors influencing the current inflation target indicates that Armenia’s economy is ready to enter a new stage of development. One of the most important steps in this process is the shift to a low inflation target of 3%, set for the long term.
According to the Central Bank’s estimates, the current 3% inflation target closely aligns with the actual perception of price stability in the country and will undoubtedly have a significant positive impact on both the long-term economic development and the standard and quality of life.
“It is estimated that lowering the inflation target will positively affect the mitigation of fluctuations in the financial and currency markets, boost the purchasing power of household incomes, and enhance the country’s investment attractiveness,” the study states.
In particular, as the authors of the report note, setting the inflation target at 3% will enable low, stable, and less volatile inflation, which will be accompanied by sustained growth in real incomes and purchasing power.
Moreover, it will help create a more stable macroeconomic environment (characterized by less volatile inflation, production, unemployment, etc.), which will reduce the likelihood and impact of future economic crises.
At the same time, reducing uncertainty about the Central Bank’s monetary policy and boosting confidence will effectively strengthen the population’s inflation expectations and reduce the costs of maintaining price stability, particularly during economic shocks.
Adopting a low inflation target for the long term will result in lower interest rates and a reduced country risk premium, which will help improve the investment climate in Armenia and boost investment from foreign and institutional investors.
“Thus, with a policy target closely aligned with the goal of price stability, a more stable long-term price level and a predictable environment for investment and consumer planning will be achieved. The experience of many countries (e.g., the Czech Republic, Chile, etc.) shows that, in the long run, price stability and a predictable macroeconomic environment are key prerequisites for sustainable economic growth and improvements in the standard of living,” the study states.
Earlier, the head of the Central Bank, Martin Galstyan, stated that the Central Bank is considering reducing the inflation target from the current 4% to 3%, as it has “built up enough muscle to do so.”
In Armenia’s state budget for 2024, inflation is projected at 4% (±1.5%). According to the latest data from the National Statistical Committee, inflation in Armenia’s consumer market in September of this year, compared to September of the previous year, was 0.6%. According to the Central Bank’s report on monetary policy for the third quarter of this year, inflation in Armenia is expected to be within the range of 2.1–2% by the end of 2024. The forecast for 2025 is 4–3.2%, for 2026 it is 4.2–3.8%, and for 2027 it is 4%.
The World Bank expects inflation in Armenia to be 3% in 2024, 3.5% in 2025, and 4% in 2026. The IMF predicts that prices in Armenia will increase by 0.2% in 2024 and by 3.1% in 2025. According to ADB forecasts, inflation in Armenia will be 0.8% in 2024 and will accelerate to 2.5% in 2025. The EDB anticipates inflation in Armenia to reach 1.5% by the end of the current year. -0-
