Monetary Policy
What is monetary policy and how does it operate
The Central Bank sets the monetary policy to achieve price stability.
At the Central Bank of Armenia, we define price stability as an annual inflation target of 3%. This doesn’t signify that inflation must strictly be 3%. Inflation can be lower or higher than 3%. However, on average, the Central Bank must converge the 3% annual inflation.
By setting the price of money, which is the interest rate, the monetary policy affects the prices of financial assets and agents’ expectations, in turn impacting the demand and prices.
The Central Bank uses monetary policy to set the price of liquidity – known as the policy rate – to guide the refinancing and money market operations of the Central Bank with the aim of adjusting the behavior of economic agents to anchor inflation expectations at the 3% target.
Additionally, it affects the behavior and economic decisions of various economic agents such as households and businesses, which is reflected in demand and inflation developments. For instance, when interest rates are low, borrowing becomes more affordable, encouraging increased spending, investment, and borrowing. Conversely, higher interest rates can discourage borrowing and lead to reduced spending and investment.
We modify monetary policy interest rates which are gradually transmitted to demand and inflation.
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What is inflation and why low and stable inflation is important
Inflation is the change in the overall level of consumer prices over a period of time.
Inflation is calculated by the Statistical Committee of the Republic of Armenia – an independent body. Inflation is measured by the consumer price index, which is the weighted average of the prices of the goods and services included in the basket that we consume. Thus, inflation represents our spending on consumption and tracks changes in the prices of goods and services consumed by a representative consumer in Armenia over some time period.
Currently, the basket of consumer goods in Armenia is comprised of several hundred goods and services; their prices are regularly recorded in the market and are included in the consumer price index based on their weight.
To ensure price stability the Central Bank of Armenia commits to maintaining sustainably low and stable inflation in Armenia. This contributes to creating favorable conditions for long-term macroeconomic stability and sustainable economic growth.
Maintaining sustainably low and stable inflation is advantageous for the welfare of Armenian citizens. While low and stable inflation protects our purchasing power as consumers, price stability helps to sustain economic growth and employment as uncertainty is reduced in regard to planning and consumer behavior.
Sustainable economic growth is the maintenance of growth and continuous improvement of Armenia’s standards of living without facing economic problems and crises.
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How do we make monetary policy decisions
Since January 1, 2006, the Central Bank of Armenia pursues the strategy of Inflation Targeting.
To achieve the main objective of price stability, central banks choose different strategies for implementing monetary policy.
The inflation targeting regime assumes that we, at the Central Bank of Armenia, operate by setting the price of liquidity, called the policy rate, to achieve a target of 3% inflation in the medium term.
Within the framework of inflation targeting, the Central Bank of Armenia follows a flexible money and exchange rate regime – we do not have any specific money or exchange rate targets that need to be maintained.
The Board of the Central Bank of Armenia decides the policy rate which it considers appropriate to steer the inflation towards the 3% target over a medium-term (12-quarter) horizon.
Eight times during the year, the Board of the Central Bank of Armenia decides on the monetary policy and sets the policy rate. Four of them are accompanied by a publication of monetary policy programs including a comprehensive macroeconomic and policy scenario analysis. In any economic situation, the Board designs and implements a program of current and future monetary policy actions that guides inflation and inflation expectations to the target with the minimum economic costs.
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How do we communicate our decisions
As an independent public institution, the Central Bank of Armenia is accountable to the citizens of the country for its commitment to the price stability goal.
Publishing policy scenarios and underlying assumptions in parallel to the target inflation indicator makes the monetary policy of the Central Bank more transparent, understandable, and predictable. This considerably increases the credibility and public confidence in the Bank’s actions and reduces the social costs of the policy. We aim to create a more predictable environment for households and firms.
The primary means of monetary policy communication are monetary policy programs, commonly known as inflation reports.
With every monetary policy decision, we publish a press release about the refinancing rate that summarizes the underlying economic rationale of the Board's decision with the key messages and forward-guiding signals to the public. In addition, the Governor of the Central Bank of Armenia holds a press conference after each monetary policy decision, which is broadcasted live with a simultaneous interpretation in English. We also publish monetary policy programs that cover a thorough analysis of the latest macroeconomic developments and outline the scenarios of the monetary policy with a projected medium-term path of inflation and key macroeconomic variables.
As a publicly accountable institution in a democratic society, we value the sufficient transparency of our policy decisions. Alongside the regular communication with the general public, we present a statement about the monetary policy at the National Assembly of the Republic of Armenia annually.
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