1 August 2018, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided on 1 August 2018 to leave unchanged the refinancing rate at 10% and other parameters of the interest rate corridor (the floor at 8% and the ceiling at 12% with ±2% deviation)

Over the past period of 2018 the inflation rate, being below the target range, maintained the decreasing trend, the balance of payments had surplus with parallel positive dynamics on economic activity. Inflationary risks potential from both the external sector and the fiscal policy contain possibilities for easing the monetary condition in the short and medium run.

The CBA Management Board considered the following when taking the decision.

Inflation. Inflation keeps decreasing. The average annual inflation stood at 3% over 6 months of 2018 – lower than the declared target.

The stronger nominal exchange rate of the manat, managing money supply at an optimum level, subdued inflation expectations and seasonal factors weighed on lower inflation, partially neutralizing the increasing effect of global commodity and food prices, as well as inflationary developments in trade partner countries on domestic inflation.

The inflation rate in Azerbaijan considerably lagged behind the average inflation rate in trade partner countries in the current year, driving down the real effective exchange rate (REEF) of the manat. The non-oil REER of the manat strengthened just 1.2% in the first half of 2018. REER of the manat has depreciated by 35.4% since end-2014, underpinning competitiveness of the non-oil sector.

Inflation expectations and forecasts. Monitoring of households and real sector entities suggest that inflation expectations remain in historical lows of recent years.

According to recent macroeconomic forecasts, dynamics within the balance of risks will define whether inflation remains in the target range by the end of 2018. Considerably rising imports, high exchange rates in trade partner countries, price volatility and fiscal expansion may activate demand and supply factors of inflation. Reaching the inflation target will also depend on the changes to government-regulated prices of goods and services.

External condition. Improved external sector indicators accompany high non-oil exports potential and favorable global oil prices. In the first half of 2018 trade surplus increased by 2.2 times, exports by 64%, and the non-oil exports by 14%. Both services export and money remittances also maintain positive trend along with trade surplus. Strategic foreign exchange reserves kept increasing amid improved external sector indicators.

Recent forecasts suggest that as of end-2018 the balance of payments (BoP) will remain with surplus. The current oil price is over USD 70, and there is a positive forecast on price dynamics by the year-end. Main threats for BoP in the short and medium run are high rate of import expansion and high capital and financial account deficit.

Economic activity. Growth dynamics of economic activity is still positive. In January – June 2018 economic growth stood at 1.3%, including 2% rise in the non-oil sector. The main factors that drive economic growth include high external demand and government investments, and improved consumer confidence indicators on the backdrop of rising households’ real income. The dynamics of the CBA real sector monitoring based Business Confidence Index also acknowledges growing economic activity. Non-oil industry sector demonstrated 11.1% growth, agriculture sector – 7.6%. Economic growth has not driven inflation up, since the growth rate has not exceeded its potential level.

Monetary condition. Over the past period of 2018, the monetary condition changed to approaching neutrality, money base expanded and the refinancing rate reduced.

By the year-end and in the medium run the potential for normalization of the monetary condition will depend on realization of external and domestic factors shaping inflationary risks and expectations.

The Management Board will discuss interest rate corridor parameters again in October 2018.

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