YEREVAN, October 23. /ARKA/. The Central Bank of Armenia has shifted its focus from a single baseline scenario to an analysis of multiple potential scenarios, aiming to identify those that pose the most significant threats, according to the regulator’s Governor, Martin Galstyan.
“Based on this, the Board of the Central Bank of Armenia makes decisions designed to steer the economy away from the most dangerous potential developments,” he stated on the Banking on Success podcast, produced by Raiffeisen Bank.
He explained that the need to revise these approaches was driven by rising global uncertainty and geopolitical risks.
“We are right in the eye of the storm. Just look at what is happening around us Russia, Ukraine, Israel, Iran, and various other events all of which, in one way or another, influence general sentiment and trends,” Galstyan said.
He noted that, given these conditions, the Central Bank concluded that its previous decision-making framework required an overhaul.
We determined that the approaches that worked well prior to 2022 would no longer be as effective in this new environment. Consequently, we have completely revamped our system,” the Central Bank Governor stated.
He added that the regulator now employs an approach known as “prudent risk management.”
“We faced criticism for this, as we abandoned the concept of a ‘baseline scenario.’ We never placed much faith in a baseline scenario, because it almost invariably proved to be incorrect,” Galstyan explained.
Galstyan also noted that other central banks are beginning to adopt similar approaches.
“We now see many central banks looking to learn from our experience.” “For example, the Bank of England has adopted a similar approach following the Bernanke report. I believe this is the right approach,” he said.
On the transparency of Central Bank decisions
The head of the Central Bank also highlighted the high level of transparency in Armenia’s monetary policy decision-making process.
“We may well be the most transparent central bank in the world, as the minutes of our discussions—including the names of the participants—are published on the very same day the Council reaches a decision,” Galstyan stated.
He added that, in addition to the minutes, the individual decisions of the Central Bank Council members are also published, with each member providing a separate explanation outlining the reasoning behind their position.
“In this way, we provide the market with a vast amount of information. And, judging by what I hear from market participants, they find this very valuable,” the Central Bank chief noted.
As of 2024, the Central Bank of Armenia has transitioned to a new monetary policy analysis and forecasting system, FPAS Mark II. This system moves away from a single baseline scenario, opting instead for two alternative inflation scenarios one above and one below market expectations. The new model focuses on risk management, the minimization of potential economic losses, and increased transparency in decision-making. It also entails the disclosure of the positions held by Central Bank Council members and the results of their individual votes, accompanied by the corresponding justifications.
