Central Bank of Armenia: High uncertainty in external demand remains  due to  deterioration risks  in global economic growth prospects and  current trends in tourist flows and remittances to Armenia

ArmInfo.High uncertainty in  external demand remains due to t deterioration risks in the global economic growth prospects and the current trends in tourist flows and remittances to Armenia. Martin Galstyan,  the Chairman of the Central  Bank of Armenia, made this statement during a press conference on  September 16, when presenting the rationale for the decision of the  Central Bank Board to keep the key refinancing rate unchanged at  6.75%.

Galstyan explained that  in Q3 2025, risks of a further slowdown in  demand conditions globally and in Armenia's key partner economies  persist, while inflationary pressures in the US have 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 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 global 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 third quarter of 2025, economic activity in Armenia continued  to accelerate. Growth in demand- driven sectors continues to offset  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 and Q3. 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 supplyside factors. Wage growth, non-traded sticky price  inflation, and inflation expectations continue to stabilize. 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%. 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.

In Q3 2025, the global growth outlook has continued to deteriorate.

The global growth outlook continues to deteriorate in the third  quarter of 2025. Recent volatility in US growth, driven by large  changes in imports and inventories, has created uncertainty about  economic fundamentals. Consumption has slowed but remains relatively  strong. The significant downward revision to the labour market  indicators in the second quarter suggests that conditions in this  market have improved. At the same time, a tightening of immigration  policy could lead to a tightening of labour market conditions and  increase inflation risks.

The outlook for US trade and fiscal policies remains highly  uncertain. Given the expected significant increase in the budget  deficit and public debt, the risks of a possible increase in  long-term interest rates have increased.

The above developments could affect not only the outlook for the US  Federal Reserve's monetary policy, but also the neutral interest rate  and capital flows in emerging markets. Although US inflation has  gradually approached the target level in recent quarters, significant  upside risks remain. The sharp increase in imports and inventories in  Q1 2025 has to some extent prevented the impact of tariffs from being  reflected in inflation. However, prices of some consumer goods that  are more sensitive to tariffs have shown an accelerating trend in  June-August. This may contain the risks of a significant acceleration  in inflation, but its scale and nature will largely depend on the  outlook for domestic demand. This situation significantly complicates  the US Federal Reserve's task of ensuring price stability and full  employment, which is especially difficult in the context of questions  related to the independence of the Federal Reserve. After a sharp  acceleration in economic growth in the euro area in Q1 2025, driven  by short-term factors, growth slowed significantly to 0.1% in Q2.  This reflects structural problems in the economy and uncertainty  related to global trade policy. The inflation environment has  continued to stabilize in recent months, approaching the target  level. Despite some decline in core inflation, it remains above the  target level. The tight labor market situation points to mixed signs  of easing. However, the medium- and long-term growth prospects remain  uncertain and complex. On the one hand, structural problems and the  trade agreement with the United States continue to put pressure on  business sentiment and growth potential. On the other hand, fiscal  stimulus measures aimed at addressing structural problems may have a  positive impact on some manufacturing sectors. However, the focus on  the military industry may lead to disproportionate economic  development, as well as inflationary consequences. Global oil prices  and inflation expectations continue to decline, although there  remains considerable uncertainty about the outlook for oil prices. On  the one hand, weakening global demand and actual and expected supply  expansion by OPEC+ countries may lead to further decline in oil  prices. 

On the other hand, the escalation of geopolitical tensions, as well  as the introduction of secondary sanctions against Russia, could lead  to potential disruptions in supply chains and create inflationary  pressure. Russia's economic growth in Q2 2025 slowed significantly to  1.1%. Inflation, as well as core inflation, despite some slowdown in  recent months, remained significantly above the target threshold.  Slower lending growth and continued weakening growth in trade and  services create risks of a further decline in demand. At the same  time, the ongoing tight situation in the labor market remains a  source of additional inflationary pressure.  Uncertainty about oil  prices creates risks for fiscal policy, and deterioration in growth  prospects could negatively affect oil and gas revenues. A significant  slowdown in demand growth and the continuing tense situation on the  labor market and high inflation expectations create serious problems  for the Central Bank of the Russian Federation in terms of  effectively managing the balance between inflation and economic  growth in the short term, since the Central Bank of Russia continues  to reduce the key rate (to 17% - from September 12 this year - Ed.).

Domestic demand conditions remain subject to uncertainty Armenia's  economic growth accelerated to 5.9% per annum in Q2 2025, approaching  the upper bound of the estimated long-term sustainable growth rate.  Moreover, this growth remained concentrated mainly in demand-driven  sectors (including construction and services), which creates risks  for the long-term growth prospects and sustainability. The  construction sector continues to grow at a rapid pace, but with real  estate prices adjusting, risks of growth in the construction sector  and related industries, weakening aggregate demand and, as a result,  deflationary risks remain. Although growth in the services sector  remains concentrated in the IT and financial services sectors (a  combined contribution to growth of 2 percentage points), the  acceleration of growth in other segments, especially in recent  months, points to a possible expansion of demand conditions.

As some short-term non-structural factors gradually weaken, trade and  industrial growth are slowing.  However, some segments of the  industrial sector continue to demonstrate positive dynamics, which is  reflected in the growth of production volumes, exports, demand for  loans and production capacity.  Tourist flows to Armenia, after a  record acceleration in 2023, slowed down significantly in 2024 and  the first quarter of 2025. However, since May 2025, the flow of  tourists has increased significantly, reaching a historically high  level, which was due to both the restoration of flows from Russia and  the growth of tourism from other countries.  The continuation of such  trends in the future may entail risks of further expansion of  external demand and acceleration of inflation in services that are  highly sensitive to it.

There is uncertainty regarding the trends of seasonal migration to  Russia and methods of money transfers.  On the one hand, long-term  maintenance of the ruble exchange rate at the current level may  increase incentives for labor migration from Armenia to Russia, while  on the other hand, high uncertainty regarding the medium-term  prospects of the Russian economy and tightening of migration policy  may somewhat restrain migration flows to Russia, contributing to the  growth of labor supply in Armenia and weakening the inflationary  environment. Domestic demand conditions are still subject to  uncertainty. The growth of lending, domestic tourism and a high level  of accumulated savings that can be directed to consumption indicate  strong domestic demand conditions. However, the structural features  of economic growth may contain risks of forming a relatively weak  demand environment. 

There is high uncertainty regarding the impact of fiscal policy on  demand. Despite the current high efficiency of tax revenues, there  remain risks of possible underfulfillment of planned tax collections  in the future. A possible increase in current expenditures due to the  need to implement social assistance programs may negatively affect  the budget deficit and public debt. A possible increase in some  capital expenditures (especially road construction programs) may  contain risks of additional demand growth. At the same time, the  risks of underfulfillment of capital expenditures, as well as a  weaker impact on demand due to their structural features, remain  significant.

Uncertainty remains regarding conditions in  labor market 

Despite a slight increase in the unemployment rate in the first  quarter of 2025 to 13.9%, which is in line with seasonal trends, it  remains close to the long-term equilibrium level. According to the  results of the labor force survey, compared to the same period last  year, the number of unemployed has decreased, and the number of  employed has increased, which is consistent with the growth in the  number of officially registered workers (according to the State  Revenue Committee of the Republic of Armenia). Although the above  trends can be interpreted as a continuing reduction in the shadow  sector of the labor market, signals from this market also indicate  continued high demand in the economy. On the other hand, annual wage  growth continues to stabilize in the range of 5-6%, and the  concentration of growth has significantly decreased. This indicates a  more balanced situation in the labor market and a reduction in  structural imbalances in the economy. In the medium term, a possible  increase in labor supply may further soften the situation in the  labor market and reduce the associated pressure. The main  uncertainties relate to the prospects of the Russian economy, trends  in seasonal migration to Russia, the level of participation in the  Armenian labour market, and the pace of integration of the  economically inactive population into the labour market.   Inflationary pressure transmitted from the global economy has  increased

Since 2025, inflation has shown a tendency to accelerate, reaching  3.6% per annum in August. This is largely due to seasonal supply  factors, the impact of which was already neutralized in June-August.   Inflationary pressure transmitted from the global economy has  increased in recent months (especially for imported food products),  which also reflects the dynamics of world food prices (FAO). At the  same time, deflationary pressure from non-food products is gradually  neutralizing, reaching 1.1% y/y in August.

In the future, the preservation of inflationary trends transmitted  from the global economy, mainly due to supply factors, may contain  the risks of accelerating inflation of imported goods and expanding  the inflationary environment. Since the beginning of the year, there  has been a certain acceleration of inflation in prices for services,  which is largely due to the high inflationary impact of air transport  (inflation in the services sector, excluding air transport, remained  below the target level - in the range of 2-2.5%). At the same time,  since May 2025, there has been an acceleration in price growth for a  number of services, mainly sensitive to external demand (hotels,  restaurants, etc.), which is generally comparable with the trends in  accelerating tourist flows in recent months. Further preservation of  the trends in accelerating growth of external demand may become a  source of pressure towards accelerating inflation. Inflation of non-  exportable goods with rigid prices, demonstrating price dynamics  determined by the demand situation, continued to stabilize in the  range of 2-2.5%. At the same time, since the beginning of this year,  the growth of core inflation has accelerated - up to 3.7% per annum  in August, mainly due to the acceleration of price growth for  imported non-seasonal food products and some exported services. In  these conditions, inflation expectations continued to steadily  decline and form near the target level, which was largely facilitated  by the preservation of a long-term low-inflation environment in the  economy.

The financial market expects the refinancing rate to decrease to  6.25%. The financial market's expectations regarding the refinancing  rate (according to the Central Bank of the Republic of Armenia  surveys) have remained virtually unchanged - a gradual decrease to  6.25% is possible over the next 8 decisions of the Central Bank  Council.

The yield curve has remained broadly stable. There have been small  upward shifts in the longer-term portion of the curve, reflecting  expectations of some increase in long-term interest rates amid  uncertainty regarding the neutral interest rate and the country risk  premium. In recent months, Armenia's country risk premium has  continued to form below the long-term sustainable level determined by  fundamental factors.  In particular, the recent decline reflects a  positive reassessment of risks, driven not only by the improvement in  overall sentiment towards emerging markets, but also by expectations  of reduced geopolitical risks in the South Caucasus.  Combined with  Armenia's growing macroeconomic stability and production capacity,  these factors create certain positive preconditions for a possible  reassessment of the country's risks and a reduction in the neutral  interest rate, which, all else being equal, could trigger potential  deflationary pressure due to a relatively tighter monetary policy. In  this context, a number of rating agencies estimate that final  fundamental adjustments to the country's risk profile in response to  the above events will only be made after the expected economic  consequences have occurred. However, any possible upward adjustment  to the country risk premium carries risks of upward revision of the  neutral interest rate. This, all other things being equal, carries  mainly inflation risks associated with the possible formation of a  more stimulating monetary policy.