The Central Bank of Armenia’s decision to raise its policy rate to 6.75% does not mean banks will immediately change rates on loans and deposits. Still, if monetary tightening continues, the cost of bank funding could gradually shift as well.
Central Bank Governor Martin Galstyan said this after the regulator’s board meeting on September 15. The board increased the rate by 0.25 percentage points, from 6.5% to 6.75%. The lombard repo rate was set at 8.25%, while the rate on funds attracted by the central bank from banks was set at 5.25%.
This was the first rate increase in more than three years.
Why loan rates do not jump the next day
The key rate is one of the benchmarks for the cost of money in the financial system, but several intermediate factors stand between a central bank decision and the rate ultimately offered to a bank client.
Loan pricing depends on each bank’s funding base, the cost of raising money, loan maturity, borrower risk, competition among banks and other factors. That is why a 0.25 percentage point move by the central bank cannot be mechanically translated into an identical increase in consumer, mortgage or business lending rates.
Galstyan also said the monetary policy transmission mechanism works with a time lag, and its speed can vary.
What happens if this is not a one-off move
The picture could change if the September decision marks the start of a longer period of tighter monetary conditions.
Galstyan said that if the current situation proves to be not temporary but a broader trend, and the cycle continues, Armenia should expect a higher level of interest rates. At the same time, the central bank has not announced the start of a new tightening cycle.
The regulator is still considering scenarios in both directions. Type A scenarios assume stronger domestic and external demand and a risk of rising inflation expectations, requiring a higher rate path. Type B scenarios are linked, among other things, to a possible slowdown in global growth and disinflation risks, implying a lower rate path.
What is happening to loan rates now
The September increase followed a long period of monetary easing. But it would be misleading to compare the central bank’s move with bank lending rates on the same day or the next day.
Data on the cost of bank lending reflect transactions that have already taken place and depend on currency, maturity, borrower category and loan type. For that reason, the practical effect of the September decision is better assessed through subsequent changes in comparable banking indicators in the central bank’s statistics.
What about deposits
A higher central bank rate may also influence banks’ funding costs over time, but the September 15 decision does not by itself mean deposit rates must rise.
Individual bank decisions depend on their funding needs, liquidity, deposit maturities and the competitive environment. As a result, the practical outcome of the move will become clearer once banking rate statistics for the coming months are released.
What is known and what remains unclear
What is known is that the central bank raised the rate from 6.5% to 6.75%. It is also clear that the governor sees scope for higher bank interest rates if monetary tightening continues.
What remains uncertain is whether the September 15 decision will become the start of a new rate-hiking cycle. It is also not yet known when, and by how much, rates on specific types of loans and deposits may change. The future movement of those indicators will show how quickly the central bank’s September decision is passing through Armenia’s financial system.
