12 February 2018, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate from 15% to 13%, the ceiling of the interest rate corridor from 18% to 16% and the floor from 10% to 8% on 12 February 2018.

The decision on interest rate corridor parameters is taken in light of entry of actual average annual inflation to a single-digit trajectory, forecasts of inflation slowdown and improved external balance. Depending on lingering of these positive trends the CBAR considers it possible to further decrease interest rates keeping their real levels in a positive zone. Estimations suggest that gradual transition to a neutral monetary policy adequately to a new economic cycle will have a positive effect on economic activity.

The CBAR Management Board considered the following internal and external processes when taking a decision on making changes to interest rate corridor parameters.

External environment. Deep macroeconomic maneuvers and economic diversification-related reforms under way since end of 2014, as well as rising global oil prices improved the balance of payments (BoP) of Azerbaijan. Current account surplus of the BoP is expected to equal to 5% of GDP as of end-2017. External trade surplus stood at $5 billion (y/y up over 10 times ($0.5 billion)). Export increased by 52%, including 23% in non-oil export. Services, primary and secondary income balances improved along with the trade balance. Services balance deficit of spiraled downward, and tourism services had positive balance. The capital and financial flow account was also in surplus.

Strategic foreign exchange reserves rose over 11% in 2017 amid improved BoP.

Positive trends in external environment are forecast to continue in 2018 as well.

The FX market. High currency proceeds as a result of the BoP improvement stabilized the FX market. On this backdrop macroeconomic policy actions resulted in 4% appreciation of the AZN/USD exchange rate. The exchange rate of manat has undergone additional appreciation pressures since Quarter II, 2017.

A stable exchange rate of manat contributed to de-dollarization, financial stability and slowdown in inflation expectations.

The REER of the manat has depreciated by 36% since the end of 2014, having an upward effect on import substitution and non-oil export stimulation.

Monetary condition. The money base in manat – the main operational target of the monetary policy increased by 8.7% in 2017. Fiscal sector’s demand for liquidity remains the key factor affecting the monetary condition on the backdrop of prevalence of supply over demand in the FX market.

The CBAR keeps standing facilities and various maturity open market operations active (up to 7, 14 and 28 days etc.) to meet demand of the economy for money and effectively manage liquidity. Amid non-recovered lending activity in the economy excess liquidity accumulated in the banking system stipulates high demand for CBAR’s sterilization tools.

In general, analyses suggest that the resulting monetary condition had a positive effect on optimum balance between consumption and savings.

Inflation. According to the State Statistics Committee, average annual inflation stood at 5.5% in current January. The anti-inflationary monetary policy, management of money supply on an optimum level and stabilization of the exchange rate of the manat since mid-2017 were critical in formation of single-digit inflation.

Changes in the ratio of aggregate demand and supply, global food prices and inflation expectations also factored in price dynamics.

Disinflationary trends are estimated to further continue, and there is a huge potential for inflation to be within the frames of announced annual inflation as of the end-2018. CBA surveys in households and businesses show that stabilization of the exchange rate and slowdown in actual inflation had a downward effect on inflation expectations. Whether inflation will remain on a single-digit level will depend on drops in inflation expectations and how sensitive they will be to changes in the economic situation.

Economic activity. Stronger macroeconomic stability had a positive effect on the revival of economic activity in 2017. According to the State Statistic Committee, non-oil economic growth was 2.7% in 2017, including 3.7% growth in the non-oil industry and 4.2% growth in agriculture. Economic growth was driven by high government investment expenditures and non-oil exports, as well as rise in consumer confidence. Economic growth is expected to maintain positive dynamics in 2018.

The CBA will further closely follow processes in the economy and financial markets, striving to safeguard price stability with tools at its disposal within its authorities.

The CBA Management Board will next discuss interest rate corridor parameters in April 2018.