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Low economic activity and weak domestic demand will be maintained in fourth quarter, CBA says

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The Central Bank of Armenia has clarified the decision of raising the refinancing rate by 1.0 percentage point.

The Bank released a respective statement:

“During today’s session the Board of the Bank decided to raise the refinancing rate by 1.0 percentage point, setting it at 5.25%.

1.3% inflation has been registered in November 2020 against the 1.1% inflation of November 2019: as a result the 12-month inflation comprised 1.6%, still being low from the 4% target. The 12-month normal inflation also continued to increase in November which comprised nearly 2.0% at the end of the month.

In the fourth quarter, the factual developments in the global economy have mainly been impacted by the new wave of the novel coronavirus (COVID-19) and the pandemic-related restrictions in some countries, which negatively affected the global demand and economic activity. On the other hand, the expectations over the possible efficiency use of vaccines in the beginning of 2021 have formed a positive environment in terms of restoring the global demand. In such situation, inflation tendencies have been observed in the international markets of both raw materials and food products, which is being gradually reflected on the inflation environment of partner countries. Based on the abovementioned developments, the CBA Board estimates that certain inflationary influence on Armenia’s economy is expected from the external sector.

In the third quarter, 9.1% economic decline has been registered in Armenia, in accordance with the CBA forecasts, compared to the same period of the previous year, which has been formed at the expense of declines registered in all spheres of the economy, especially the services sector. In the fourth quarter, according to the CBA estimates, low economic activity and weak domestic demand will be maintained connected with the martial law declared in Armenia and the outbreak of the new wave of COVID-19, as well as with the negative impacts of uncertainty which is connected with the economic growth prospects under the aforementioned factors. On the other hand, the expanding fiscal policy will continue to bring a positive contribution to the overall demand. In such conditions, annual estimates of economic growth for 2020 have not been revised.

Taking into account the certain acceleration of inflation under the expected inflationary effects from the foreign economy and the increase of the country’s risk premium, the CBA Board finds it appropriate to raise the refinancing rate. The Board also estimates that the monetary-credit position remains stimulating, which will need to be gradually cut in the expected horizon, ensuring the inflation stability around the targeted 4%”.

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