30 October 2018, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate from 10% to 9.75%, while the ceiling and the floor of the interest rate corridor were set at ±2% range (the ceiling 11.75%, the floor 7.75%) from 30 October 2018 onward.
Inflation kept decreasing over the period following the last meeting of the Management Board. Nine-month average annual inflation (2.6%) stood below the CBA’s current target range (6-8%). The Bank is forecasting 3-4% inflation for the current year in the environment of softer external and internal risk factors.
Corrections to the refinancing rate will depend on consistency of the forecast inflation with the inflation’s announced target range.
Inflation. Average annual inflation has been decreasing over recent 3 months – it stood at 2.6% over 9 months of 2018 and slowed at a rhythmical pace over Quarter III.
No considerable changes were witnessed in external and domestic factors of inflation. Inflation’s downward trend was driven by decrease in prices for a number of food and non-food products and overall monetary factors, which neutralized increase in service costs driven by high transportation tariffs.
Inflation expectations and forecasts. Inflation expectations of the business sector go down due to lower expectations on increase in prices for trade and services. The current behavior of consumer prices also stipulates stabilization of inflation expectations of households.
Recent macroeconomic forecasts suggest that inflation will be around 3-4% as of the end-2018.
External condition. The international conjuncture has remained favorable for Azerbaijan over recent 3 months. Average oil prices y/y jumped by 38% over 9 months.
On this backdrop surplus of the balance of payments (BoP) keeps increasing. Positive external trade balance accounted for about 19% of GDP over 9 months. Non-oil export y/y rose by 13%.
Amid capital access and geopolitical tensions triggered by changing external funding conditions, sharp devaluation of national currencies in some trade partners had no considerable impact on external trade balance – policy decisions by central banks of these countries, including rising interest rates, stabilized financial markets.
The domestic FX market remained balanced on the backdrop of improved external sector indicators – strategic foreign exchange reserves reached $45 billion.
Positive trends in external environment are expected to continue over the remaining part of 2018.
Economic activity. Economic growth has been positively zoned for 4 quarters in row, yet it is below the potential. Growth was 0.8% in January – September 2918, including 1.1% growth in the non-oil sector. The non-oil industry grew by 10.7%, agriculture by 4.3%.
The business confidence index based upon CBA conducted surveys suggests that economic activity has relatively elevated across all sections, except for construction.
Economic activity is driven by both external and domestic demand.
Amid low inflation, high real income of the population and recovery of consumer lending is accompanied by higher consumption. The consumer confidence index has been positively zoned over 4 quarters in row.
Low overall investment activity has a downward effect on economic growth on the backdrop of stimulation of economic growth by both oil and non-oil export components of external demand.
Inflation risks. In a short run reductive and stabilizing factors prevail in the balance of inflation risks, which include favorable oil prices, surplus in the BoP, and foreign exchange reserves exceeding sufficiency norms. The said factors contribute to recent rebalancing in the FX market. However, domestic inflation is still vulnerable to exchange rate and price volatility in trade partners, and changing global food prices. In medium run, macroeconomic stability and resilience will depend on a macroeconomic framework built upon the optimum monetary and conservative fiscal policy, and regulation of problems in the financial sector within this frame.
Monetary condition. New interest rate corridor parameters will serve as a signal that has a downward effect on lending rates by making national currency denominated savings still attractive amid low inflation meanwhile neutralizing the effect of other factors.
Further normalization of the monetary condition will be dependent on how consistent the forecast inflation with the inflation target rate is.
The CBA Management Board will discuss interest rate corridor parameters again in late December 2018.