Central Bank of Armenia Keeps Refinancing Rate at 6.75% and Approves Executive Monetary Policy Statement

2025 August
Executive
Monetary
Policy
Statement
Published August 5, 2025

Executive Monetary Policy Statement | August 2025 2 A. Executive Monetary Policy Statement The Board of the CBA decided today to keep the refinancing rate unchanged at 6.75%. At its meeting today, the Board of the Central Bank of Armenia decided to keep the key policy rate (refinancing rate) unchanged at 6.75%. Annual CPI inflation accelerated in Q2 2025, standing at 3.9% in June. Meanwhile, core inflation edged up slightly, standing at 3.1% Y-o-Y in June. In Q2 2025, risks of a further slowdown in demand conditions globally and in Armenia’s key partner economies intensified, while inflationary pressures in the US intensified. Uncertainty surrounding US trade policy and its macroeconomic implications remains elevated. Uncertainty has also increased regarding the medium-term implications of US fiscal policy, including the extent of aggregate demand support, the resulting rise in public debt, and its potential impact on long-term interest rates. At the same time, persistent geopolitical uncertainty and heightened tensions in international trade relations continue to pose risks of supply chain disruptions and renewed global inflationary pressures. Further, global food prices have ticked up since the beginning of the year, primarily driven by supply factors. A persistence of these trends could be a primary source of further increases in domestic inflationary pressures. In this context, considering weakening demand conditions on the one hand and persistent inflationary risks on the other, central banks in major economies would be expected to either maintain or gradually ease their tight monetary stance. In the second quarter of 2025, economic activity in Armenia accelerated, with growth in demand-driven sectors offsetting the gradual dissipation of certain short-term, non-structural growth drivers. Sustained, robust growth in the construction and services sectors has remained the key driver of overall economic activity. Following sustained declines in 2024 and Q1 2025, external demand for services has increased in Q2. At the same time, uncertainty remains elevated regarding the sustainability of this growth, its long-term trajectory, and the future outlook for domestic demand. In this context, demand continues to have a neutral impact on inflation, while recent increases in headline and core inflation have been driven by supply-side factors. Labor market conditions continue to cool, as reflected in the gradual stabilization of wage growth, non-traded sticky price inflation, and inflation expectations. At the same time, risks for medium-term demand pressures from fiscal policy persist. In the context of current macroeconomic developments, financial markets in Armenia generally expect the Central Bank of Armenia to gradually lower the refinancing rate over the next twelve months to approximately 6.25%. In order to manage possible risks stemming from conditions of high uncertainty, the Board considers multiple scenarios during its deliberations. On the
one hand, the Board discussed scenarios where possible underlying developments would require a higher path for the policy rate relative to current market expectations. This includes scenarios related to risks of a rising neutral rate globally and in Armenia in the context of geopolitical tensions and fiscal policies, as well as risks of expanding demand conditions. On the other hand, the Board also discussed scenarios where potential economic developments—including uneven weakening of certain sectors of the economy amid adjusting external demand; concerns regarding a weak demand environment forming and deepening in the economy due to a potential gradual adjustment of real estate prices; and overall concerns about the outlook for the global economy—would cause inflation to persistently remain at a low level. This would imply a more rapid and aggressive downward path for the policy rate than what is currently priced in markets in order to sustainably bring inflation back to target in the medium-term horizon. Emphasizing the buildup of Case A-type risks and seeking to minimize the losses that could stem from these and other scenarios materializing, the Board finds it appropriate to keep the policy rate unchanged. The Board resolutely affirms its commitment to adopting the appropriate policy actions and strategy to ensure the price stability objective of 3% inflation in the medium term. Approved by the Board of the Central Bank of Armenia August 5, 2025 Deputy Governor Armen Nurbekyan Board Members Hasmik Ghahramanyan Davit Nahapetyan Artak Manukyan Levon Sahakyan Narek Ghazaryan

Executive Monetary Policy Statement | August 2025 3 B. Summary of Economic Conditions Global Economy In Q3 2025, the global growth outlook has continued to deteriorate. In the United States, recent volatility in GDP growth due to swings in imports and inventories adds uncertainty about the health of the underlying economy and aggregate demand conditions. Consumption, the major driver of US growth in the post-Covid era, has shown signs of cooling while still remaining broadly elevated. Further, sharp downward revisions to Q2 labor data suggest meaningful weakening in labor market conditions. At the same time, significant tightening of migration policy could create labor supply issues and bring about excessively tight labor market conditions, fueling risks of further inflationary pressures. Amid these conditions, uncertainty surrounding the outlook for US economic policies—particularly trade and fiscal policy outlook—remains elevated. Given the significant expected expansion of the fiscal deficit and national debt, risks of a potential rise in long-term interest rates have deepened. Such developments could impact not only the future course of the Federal Reserve’s monetary policy but also impact the neutral interest rate in, and capital flows to, emerging markets. While US inflation continued to gradually recede toward the target in recent quarters, trade policy continues to pose meaningful upside risks. A significant increase in imports and inventories in Q1 helped shield consumers from increased prices, but the most recent inflation data in June shows early signs of inflationary pressures emerging for consumer goods most sensitive to tariffs. An acceleration of these trends could bring about a significantly more inflationary environment, but the extent and nature of any inflationary acceleration would depend on the trajectory of domestic demand conditions. These issues significantly complicate the Federal Reserve’s trade-off between maintaining price stability and achieving full employment, a challenge that is further compounded by potential risks of deteriorating central bank independence. Following a strong uptick in growth in the Eurozone in Q1 2025 due to short-term factors, growth in Q2 slowed meaningfully to 0.1% Q-o-Q, reflecting sustained structural challenges and economic uncertainty stemming from global trade policy. The inflationary environment continued to remain stable, with headline inflation converging around the target for several consecutive months. Meanwhile, indicators of underlying inflation, while still above the target, are gradually moderating, while tight labor market conditions also exhibit modest, though mixed, signals of softening. However, the medium and long-term growth outlook remains uncertain and problematic. On the one hand, structural challenges within the Eurozone and an imbalanced trade deal with the US continue to weigh on sentiment and growth potential. On the other hand, sweeping fiscal stimulus measures
aimed at addressing structural challenges could have positive impacts on certain productive sectors, but the emphasis on increasing defense output could have uneven and inflationary implications. Following some easing in immediate geopolitical risks in the Middle East, oil prices continued to adjust downward, and while markets continue to price sustained declines in prices through 2026, significant uncertainty around the trajectory of oil prices persists. On the one hand, slowing global demand, coupled with actual and expected increases in supply by OPEC+ countries, could each support a downward trend for oil. On the other hand, the potential for an escalation in geopolitical tensions, as well as risks of secondary sanctions against Russia, pose risks of supply chain disruptions and upward price pressures. In Q1 2025, Russia’s economic growth weakened significantly to 1.4% Y-o-Y. At the same time, headline and core inflation, despite moderating somewhat in recent months, still remain well above target. Meanwhile, slowing credit activity, along with persistent deceleration in trade and services, pose further downside risks to domestic demand. On the other hand, labor market conditions remain exceedingly tight, exerting sustained inflationary pressures on the economy. Further, oil price uncertainty could pose risks to fiscal policy, while a weakening growth outlook could negatively impact non-oil and gas revenues and pose additional downside risks to the economy. The combination of weakening demand conditions, persistently tight labor market conditions, and high inflation expectations pose serious challenges to the Central Bank of Russia in managing the inflation-output tradeoff, even as the CBR has begun to aggressively ease the policy stance. Domestic Demand Conditions Economic activity accelerated in 2025 Q2, standing at 8.6% Y￾o-Y in June. On the one hand, trade and industry continued to slow amid a gradual fading of certain short-term, non￾structural factors. However, select sub-sectors of manufacturing continued to show positive signs, with strong growth in output, exports, lending activity, and production capacity. On the other hand, growth continued to be concentrated in demand-driven sectors including construction and services, which could pose risks to the future sustainability of growth and the long-term outlook. Construction continues to grow at a rapid pace, but persistent risks of a gradual adjustment in real estate prices could threaten growth in adjacent sectors, contribute to weakening demand conditions, and pose deflationary pressures. At the same time, while growth in services remains somewhat concentrated in specific subsectors, the more widespread nature of recent services growth in other subsectors could point to a potential expansion in aggregate demand conditions. In this context, the current structure and nature of growth poses considerable uncertainty regarding the balance between aggregate demand and aggregate supply.
Although these imbalances had markedly declined in recent quarters, the latest developments could point to a potential expansion in demand conditions. Following record inflows in 2023, tourist flows to Armenia in 2024 and through 2025 Q1 had substantially moderated. However, in May and June, tourist flows to Armenia increased significantly to historically high levels, driven by a recovery in tourism from Russia as well as significant growth from other, non-traditional markets. The persistence of these trends could

Executive Monetary Policy Statement | August 2025 4 increase aggregate demand pressures and exert inflationary pressures, especially on services exposed to external demand. Uncertainties persist about seasonal migration to Russia and the channels through which remittances are transferred. On the one hand, a strengthening ruble could increase incentives for labor migration to Russia. On the other hand, uncertainties surrounding the Russian economic outlook and tightening migration policies may act as limiting factors. The latter scenario could support an increase in labor supply within Armenia and contribute to easing inflationary pressures. Uncertainty continues to surround domestic demand conditions. Strong growth in imports, consumer loans, domestic tourism, and especially accelerating inflation for some services point to robust domestic demand. However, the structural characteristics of economic growth could point to risks of a relatively weak demand environment emerging. There is considerable uncertainty regarding the impact of fiscal policy on aggregate demand. While tax collection in 2025 YTD has been strong, risks of future revenue underperformance persist. This, coupled with potential increases in current expenditures given the need for social assistance programs, could have short- to medium-term implications on deficit and debt levels. A higher public debt trajectory may also raise concerns about debt sustainability, exerting upward pressure on the country risk premium. At the same time, potential growth in certain capital expenditures (especially road construction projects) could pose risks of expansionary demand pressures. On the other hand, risks of capital expenditure underperformance, as well as the structural characteristics of these expenditures, could mitigate fiscal policy’s impact on aggregate demand. Labor Market & Inflation Underlying labor market conditions remain a key source of uncertainty. While unemployment increased in Q1 in line with seasonal trends, its current level of 13.9% remains near long￾term sustainable levels. The labor market survey suggests Y￾o-Y declines in the number of unemployed and strong increases in the number of employed persons, a trend that is corroborated by the increase in the number of registered employees (per SRC data). While the latter data could merely reflect a gradual, structural decline in the shadow labor market in favor of formal employment, taken together, these signals from the labor market could point to still-strong demand conditions in the economy. On the other hand, wage growth continues to stabilize in the range of 5-6%, and is somewhat more evenly distributed across sectors of economy than in recent quarters. This could suggest more balanced labor market conditions and fewer structural imbalances in the economy. In the medium and long term, a potential expansion in labor supply could ease labor market conditions further and reduce market-driven pressures. The primary
uncertainties in this context relate to the Russian economic outlook, flow of Armenian labor migrants to Russia, domestic labor market participation, and integration of economically inactive populations into the workforce. Over 2025, inflation has shown some signs of accelerating, with CPI standing at 3.9% Y-o-Y in June. Acceleration in annual inflation has been primarily driven by above-average increases in seasonal food prices, though this pattern has begun to cool in June. At the same time, inflationary pressures from the global economy, particularly for imported food, have increased, reflecting increases in global food prices. A persistence of these trends could be a primary source of further increases in domestic inflationary pressures. Services inflation has increased somewhat in 2025, primarily driven by high inflation for air transport services; excluding this subgroup, services inflation has remained stable and below target. At the same time, inflation for services highly exposed to external and domestic demand (e.g. hotels, restaurants, etc.) increased in May and June, consistent with increases in tourist inflows observed during this period. The persistence of these trends could serve as a source of upward pressure moving forward. However, Non-Traded Sticky Price Inflation (NTSPI), which captures domestically-driven demand dynamics, has continued to remain stable, in the range of 2.0- 2.5% Y-o-Y. Conversely, core inflation has accelerated somewhat since the beginning of the year (3.1% Y-o-Y in June), primarily reflecting the above-described increases in imported non-seasonal food and certain exportable services. In this context, inflation expectations have continued to steadily decline, approaching the target level, supported by a prolonged low-inflation environment. Financial Markets & Monetary Policy Market expectations of the CBA policy rate path have remained largely unchanged since the latest decisions, and continue to reflect an expected gradual reduction in the policy rate to 6.25% over the next eight decisions. Given the above, the yield curve has remained largely unchanged, although very modest upward shifts in the long-term portion of the curve could suggest expectations of slightly higher long-term rates, in the context of neutral rate and risk premium uncertainty. In recent months, Armenia's country risk premium has remained below the long-term stable level determined by the country's fundamentals. However, upward risks to the country risk premium persist amid uncertainty surrounding debt sustainability and geopolitical risks, including border tensions and regional developments. A potential upward adjustment of the country risk premium poses risks for a revision of the neutral rate to the upside, which, all else being equal, could create inflationary pressures due to a more accommodative monetary policy stance. At the same time, Armenia’s macroeconomic stability and strong economic growth provide certain positive factors for
a possible reassessment of the country’s risk premium and reduction in the neutral rate. Considering the persistence of numerous types of uncertainty, the CBA builds and evaluates several different scenarios for future economic developments in order to manage possible risks stemming from these key areas of uncertainty. The key Case A scenarios (policy rate path above than market expectations) relate to risks of higher global and domestic neutral rates, country risk premium uncertainty, uncertainty surrounding regional geopolitical developments, and risks of increasing aggregate demand conditions forming. The key Case B scenarios (policy rate path below market expectations) pointed to the uneven weakening of certain sectors of the economy amid adjusting external demand; concerns regarding a weak demand environment forming and deepening in the economy due to the gradual decline (adjustment) of real estate prices; and overall concerns about the outlook for the global economy.