14 June 2018, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate from 11% to 10%, while the ceiling and the floor of the interest rate corridor was set at a ± 2% symmetric range to the refinancing rate effective from 14 June 2018 onward.
The decision on the parameters of the interest rate corridor is based on the analysis of recent macroeconomic developments and updated macroeconomic forecasts. Over the past period of 2018 inflation was below the target range. Balance of payments is still in a surplus due to faviorable price trajectory in global oil market accompanied with ongoing positive dynamics of economic activity. Recent macroeconomic forecasts suggest that the normalization of the monetary condition in the upcoming period will depend on the external and fiscal sector developments.
The CBA Management Board considered the following when taking the decision:
Inflation. Inflation keeps decreasing. The average annual inflation stood at 3.2% over 5 months of 2018. The growth rate of the population’s nominal income prevailed over the general level of prices.
The stronger nominal exchange rate of the manat, managing money supply at an optimum level, and subdued inflation expectations weighed on lower inflation. Seasonal factors also contributed to decrease in inflation. Monitoring of households and real sector entities show that inflation expectations hit the minimum level of recent years.
Recent forecasts suggest that as of the end-2018 inflation will remain on a single digit level within the target range if current macroeconomic trends continues. The main inflationary risks include high inflation in main trade partners, rising domestic production costs, high aggregate demand amid fiscal expansion, and asymmetric sensitivity of exchange rate and inflation expectations.
External factors. Indicators of the balance of payments (BoP) keep improving. In Quarter I the surplus of the current account equals to 15.4% of GDP. Positive trends in the external sector continued in Quarter II. Over 5 months of 2018 positive external trade balance y/y increased 2.1 times, exports 65.8%, and non-oil export 14.2%. Improvement of external sector indicators is driven by increasing non-oil export and favorable oil prices.
The services balance also keeps improving along with the trade balance. Deficit of the services balance y/y decreased over 2 times in Quarter I, while tourism services maintained positive balance. The dynamics of remittances also contributed to increasing foreign exchange inflow.
Strategic foreign exchange reserves of the country continue rising amid improving external sector indicators.
According to recent forecasts, indicators of the BoP will remain favorable as of the end of 2018. Main threats for the BoP in the medium run include uncertainties in the global oil markets, and significantly increasing import in response to broader aggregate demand and depreciation of exchange rates in partner countries.
Economic activity. Economic activity preserved positive dynamics in 2018 – economic growth stood at 1.1% in January – March, including 1.9% non-oil growth. The non-oil economy grew by 8.1%, and agriculture 8.6%. Non-oil economic growth was driven by high external demand and public investments. Better consumer confidence indicators, rising income of the population and gradual restoration of retail lending also contribute to economic activity. Real sector monitoring conducted by the CBA also confirms higher economic activity in comparison to the previous year. Estimations of output gap and the potential level of economic activity suggest that rising economic activity does not push inflation.
Recent forecasts suggest that economic activity will continue to the end of 2018. In the medium and long run, growing economic activity in the country will exceed the rate of global economic growth in case the macroeconomic stability and speed of reforms on diversification of the economy sustain.
Monetary condition. In 2018 the monetary condition was approaching neutrality – balanced easing of the monetary condition maintained balance between price stability and support for economic growth.
The CBA’s monetary transactions had an upward effect on money base. The balance of CBA’s sterilization operations through short-term notes and deposit auctions decreased by 12.3% in January – May, neutralizing downward effect of fiscal operations on money base. Amid weak lending recovery and large-value structural liquidity in the banking sector, interest rates on CBA’s open market operations are being set close to the floor of the interest rate corridor.
On the backdrop of falling inflation expectations de-dollarization continued over the past period of 2018 – since the beginning of the year share of foreign currency denominated deposits in broad money supply (M3 money aggregate) has decreased by 2.1 p.p., while dollarization of savings of individuals dropped by 3.6 p.p..
The CBA will take interest rate corridor parameters related decisions over the remaining period of 2018 in light of inflation dynamics, inflationary risks, economic growth outlook and developments in the monetary sector.
The CBA Management Board will discuss interest rate corridor parameters again in August 2018.