YEREVAN, September 21. /ARKA/. This week, Armenia’s financial agenda was shaped by changes in monetary policy direction, the cost of bank funding, inflation, and the situation in the foreign exchange market.
1. Monetary Policy: Central Bank Raises Rate to 6.75%
On September 15, the Board of the Central Bank of Armenia raised the monetary policy rate by 0.25 percentage points to 6.75%. The Lombard repo rate was set at 8.25%, and the rate on funds attracted by the Central Bank from banks was set at 5.25%. This was the first rate increase in more than three years.
Central Bank Chairman Martin Galstyan attributed the decision primarily to increased domestic demand. The regulator is considering various development scenarios, taking into account domestic demand, inflation expectations, external economic conditions, and the country’s risk premium.
For the financial market, the rate hike could signal a change in direction from the regulator’s latest decision after a prolonged period of monetary easing.
2. Banking Sector: Central Bank Rate and the Cost of Borrowing
The Central Bank’s rate hike has once again brought the cost of bank funding into the spotlight. Central Bank Chairman Martin Galstyan did not rule out an increase in interest rates on loans in Armenia if the monetary policy tightening cycle continues. However, he emphasized that the transmission mechanism operates with a time lag.
Armenian Prime Minister Nikol Pashinyan, commenting on this issue in parliament on September 16, stated that a consistent upgrade of the country’s sovereign rating should contribute to lower interest rates. At the same time, he noted that external inflationary factors, including the Russian-Ukrainian conflict and the situation in the Strait of Hormuz, are impacting the cost of financial resources.
Thus, the current cost of borrowing may be influenced by a variety of factors: tightening monetary conditions, the Central Bank’s rate transmission, external inflationary pressure, and changes in sovereign risk.
3. Foreign Exchange Market: Dollar Stable, Euro Weak, Ruble Strengthened
On the Armenian foreign exchange market, the dollar exchange rate remained virtually unchanged from September 14-18: the US currency appreciated from 363.28 drams to 363.44 drams, or less than 0.05%.
Over this period, the euro declined from 419.23 drams to 417.05 drams, a decrease of approximately 0.5%. The Russian ruble, by contrast, strengthened from 4.2997 drams to 4.3123 drams, a decrease of approximately 0.3%.
For the banking and foreign exchange markets, this dynamic may indicate continued relative stability in foreign exchange conditions, with limited fluctuations in the exchange rates of major foreign currencies against the dram.
4. Capital Markets: Risk Premium Declines to Approximately 170 Bps
The risk premium on Armenian Eurobonds has declined to approximately 170 basis points, Central Bank Governor Martin Galstyan announced on September 15. The Central Bank attributes this trend to both global liquidity and demand for emerging market assets, as well as factors specific to Armenia, including changing country risk perceptions.
For the capital market, this could mean a reduction in investor-perceived country risk and an improvement in the current pricing environment for Armenia’s sovereign debt instruments.
5. Financial Reforms: Central Bank and IMF Discuss Banks, Payments, and Capital Markets
On September 16, the Central Bank of Armenia and the IMF mission discussed Armenia’s macroeconomic situation, monetary and foreign exchange policy, international reserves, and the state of the financial sector. Particular attention was paid to the implementation of structural benchmarks under the current Stand-By Arrangement (SBA).
For the financial sector, this agenda may mean continuing to fine-tune systemic risk management mechanisms and financial infrastructure. This work encompasses banking regulation, payments, and the capital market.
6. Investment Market: Freedom Broker Armenia Assesses the Impact of the Central Bank Rate Hike
Freedom Broker Armenia Director Hovak Hovakimyan does not believe that the 0.25 percentage point increase in the Central Bank rate will have a significant impact on market sentiment and investment activity in the local market.
In the government bond market, Hovakimyan allows for some slight pressure on prices. If the monetary policy tightening cycle continues, the market reaction, he estimates, will be more pronounced; however, low liquidity could slow the repricing of individual issues.
Therefore, the first rate hike in more than three years is currently viewed by market participants primarily as a moderate adjustment to monetary conditions. For the capital market, changes in government bond yields, the liquidity of individual segments, and the speed with which the Central Bank’s decisions are transmitted to the prices of financial instruments may have a direct impact.
7. International Reserves: Transfer and Capital Inflows Deliver Record $6.5 Billion
Armenia’s gross international reserves rose to a record $6.5 billion in August, driven by significant remittance and capital inflows, according to the World Bank’s September review released last week. This amount is equivalent to approximately 4.3 months of import coverage.
For the financial market, the record level of reserves could signify a strengthening of the country’s external financial position and the accumulation of additional foreign exchange liquidity.
8. Inflation: Food Accounts for 57% of Price Increases
World Bank analysts indicate that food and non-alcoholic beverages account for 57% of inflation in Armenia. Inflation in August declined slightly, to 4.4% year-on-year from 4.5% year-on-year in July, and core inflation is close to headline inflation, reflecting strong domestic demand and a narrowing output gap.
For the financial market, this inflation structure may indicate continued price pressure from domestic demand, despite a slight slowdown in overall inflation in August.
Weekly Summary
This week marked a shift in monetary policy toward a tighter stance: the Central Bank raised the key rate for the first time in more than three years. The impact of this decision on lending and the capital market is determined by the speed of the transmission mechanism and the state of liquidity.
The main areas of market attention remain the transmission of the new Central Bank rate to credit and debt instruments, inflation dynamics, currency flows, and the further adjustment of financial regulation.
