YEREVAN, November 6. /ARKA/. The Central Bank of Armenia’s further decisions on the refinancing rate will depend on inflation dynamics and its structure, according to Freedom Broker Armenia Director Hovak Hovakimyan.
“If persistent inflationary pressure begins to ease and external risks do not intensify, we expect a pause at the current rate of 7.0% at the next meeting. If core inflation accelerates again or the pass-through of external costs to consumer prices intensifies, the likelihood of a further increase will increase,” he said in an exclusive comment to ARKA news agency.
Reasons for the Rate Hike
According to the expert, the 0.25 percentage point increase in the refinancing rate to 7% at the Central Bank of Armenia’s November 3 meeting was a response to persistent inflationary pressure.
Hovakimyan noted that the Statistical Committee’s data published after the meeting showed that annual inflation in October was 4.3%, above the Central Bank’s target of 3% and the upper limit of the permissible deviation of ±1 percentage point.
“Higher rates of price growth were observed in the categories of food and non-alcoholic beverages (5.6% year-on-year), restaurants and hotels (5.6%), and alcohol and tobacco (7.6%). At the same time, the Central Bank points to persistent signs of excess demand,” he explained.
External Factors and Inflation Risks
According to the Director of Freedom Broker Armenia, external factors remain a significant risk to inflation in Armenia.
“Oil and energy prices influence inflation through fuel, transportation, and logistics, and then through commodity and food prices, although with a lag. “In October, prices in the “Transport” category decreased by 0.5% month-on-month, maintaining a 2.4% year-on-year growth rate,” he said.
However, according to Hovakimyan, this does not preclude the pass-through of fuel and logistics costs to other consumer prices.
The expert noted that Brent crude oil, even after a recent correction to around $95 per barrel, remains significantly more expensive than at the beginning of the year.
“The effect of previously increased costs may continue to manifest itself in the coming months; its scale will depend, among other things, on the dram exchange rate,” he noted.
Impact on Loans and the Bond Market
As Hovakimyan explained, from September 15 to November 4, the calculated yield curve for dram-denominated government bonds, published by the Central Bank of Armenia, increased by approximately 0.5 percentage points for maturities of up to one year and by 0.6-0.8 percentage points for maturities of over five years. Moreover, according to him, a significant portion of the increase in yields occurred before the regulator’s November meeting.
According to the expert, the increase in the refinancing rate creates the preconditions for a gradual increase in the cost of new dram-denominated loans, while the impact on existing loans will depend on the terms of the relevant agreements.
“For borrowers, the increase in the rate creates the preconditions for a gradual increase in the cost of new dram-denominated loans; the impact on existing loans depends on the terms of the agreement. Rising market yields allow investors to lock in higher returns on new bond investments, while simultaneously putting pressure on the prices of previously issued fixed-coupon securities, especially long-term ones,” he notes.
According to Hovakimyan’s forecast, government bond yields will remain elevated until the next meeting and will respond to inflation data, expectations regarding future Central Bank decisions, and the dynamics of external interest rates.
