Baku city, 1 February 2019
The Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate to 9.25% from 9.75%. The ceiling of the interest rate corridor was set at 11.25%, and the floor at 7.25% (±2% symmetric range). The decision will take effect on 1 February 2019.
Since the last meeting of the Management Board dedicated to the monetary policy inflation has followed the expected trend remaining at a low one-digit rate.
High inflation risks are relatively slowing down. The adopted macroeconomic stability frame, improving external sector indicators, continuing balance in the FX market, still low inflation and price hike expectations, as well as adoption of fiscal rules allow normalization of the monetary condition. At the same time, the anti-inflationary nature of the monetary policy is maintained in view of a number of internal and external inflationary factors and risks.
Inflation. Over recent 2 months key factors that push price dynamics are mainly seasonal and one-time by nature. The monetary condition still has a containing effect on inflation. Consequently, monthly inflation in December was just 0.8%. Prices for 31% of products included to the consumer basket remained unchanged, prices for 15% declined in December. Price hike for major products that rose in price was below 2%.
Average annual inflation was 2.3% in 2018 (y/y down by 10.6 p.p (12.9% in 2017)). 12-month change of the price index, used as the main inflation indicator in an international practice was 1.5% (y/y down by 6.4 p.p. (7.9% in 2017)). Average annual core inflation, calculated by excluding the goods and services with administratively regulated prices and seasonal agricultural products, was 1.8%.
Inflation expectations and forecasts. Since the last Board meeting inflation expectations of businesses decreased in trade, and slightly increased in services, non-oil processing and construction. Households’ inflation expectations remained stable at a minimal level. In general, inflation expectations of economic agents are stabilizing around actual inflation.
External condition. Drop in oil prices in the last quarter of 2018 was replaced by an upward trend in January 2019 – oil prices rebound to $60 per barrel and increased by 20% compared to the bottom line end-December.
No developments with potential effect to domestic inflation and inflation expectations were witnessed in financial markets of trade partners and in the dynamics of global commodity prices.
In January of the current year strategic foreign exchange reserves increased by 3% to over $46 B, proving that the balance of payments remains in surplus.
Economic activity. The economic growth rate elevated in Quarter IV, 2018 and in December in particular. As of the end-2018, economic growth stood at 1.4%. Non-oil economic growth made up 1.8%, mainly driven by trade. The non-oil industry rose by 9.1%, and agriculture by 4.6%.
The business confidence index based upon real sector monitoring by the Central Bank demonstrates growth across all economic sectors. Household surveys also suggest that the consumer confidence index is positively zoned and keeps increasing.
Inflation risk. The role of stabilizing factors is boosting in inflation’s risk balance.
The current macroeconomic framework enables maintaining inflation within the target. Stability parameters of the national economy for the current year and medium run are addressed in the recent Statement by the Central Bank on the main directions of the monetary policy and in the 2019 State Budget. The balance of payments with surplus and stable exchange rate of manat, as well as expectations caused by low price hikes have a stabilizing effect on inflation.
Decree of the President of the Republic of Azerbaijan dated 22 December 2018 on a number of issues related to introduction of the Law of the Republic of Azerbaijan on the State Budget of the Republic of Azerbaijan for 2019 instructs the Government on establishing and realization of additional measures to reinforce sustainability of macroeconomic stability. The Bank has drafted a related actions plan.
Certain external and internal risk factors keep their potential. External factors include potential volatility of global oil prices amid weaker global economic growth and uncertainties related to exchange rate swings in financial markets of trade partners, while internal factors include the scale and continuity of the effect of tax reforms and lending activity on aggregate demand.
Monetary condition. Central Bank’s decisions on normalization of the monetary condition contribute to the balance between keeping inflation within the target and supporting continuation of economic growth on a potential level. Since the last Board meeting the monetary condition was affected by a number of factors. Money base in manat reacted to changes in the balance of government accounts. High demand of the real sector for loans elevates banks’ demand for liquidity pushing up interest rates on deposits. Term deposits of individuals in manat keep increasing at a high rate (23.6% in 2018), attributable to higher attractiveness of natonal currency denominated savings.
The Central Bank will adjust the parameters of the interest rate corridor in response to actual and forecasted inflation rate and the realization of risk scenarios.
Next disclosure by the Central Bank on the interest rate corridor parameters will go public on 15 March 2019.