15 March 2019, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate to 9% from 9.25%. The ceiling of the interest rate corridor was set at 11%, and the floor at 7% (±2% symmetric range). The decision is taking effect on 15 March 2019.

Since the last meeting of the Board dedicated to the monetary policy annual inflation has followed the expected trend remaining below the target range.

The key priority of the Central Bank policy is to ensure that inflation is maintained within the target amid higher economic activity. Albeit significant soothing since early 2018 positive zoning of real interest rates allows to neutralize internal and external risks. Under the updated outlook inflation will settle within the target (4±2%) in 2019.

Inflation. In January – February of the current year (February vs previous year December) inflation was 0.8%. Total price level increased by 2.1% on food and 0.2% on non-food products, while prices for services decreased by 0.6%. Food prices were driven by seasonal factors. In January – February prices for 15% of products included to the consumer basket remained unchanged, and prices for 16% of products declined. Price hike for 85% of products that rose in price was below 2%.

In February 2019 12-month inflation was 2.1%, close to the bottom of the current band. Average annual inflation stood at 1.9% in January – February (y/y (4.7%) down by 2.8 p.p.).

Inflation expectations. Since the last monetary policy meeting of the Board inflation expectations of businesses have undergone no significant changes. According to the real sector monitoring by the Central Bank over recent 2 months, price expectations have declined in trade, non-oil processing and construction, and increased in services. No rise was witnessed in the share of respondents among households who expect high inflation.

External condition. External environment remains favorable. According to initial data, in January – February external trade surplus amounted to $986.3 M – export increased by 42.6%, including 16.4% rise in non-oil export. 

Commodity prices in global markets have been prone to rising over recent months. In January - February 2019 oil prices made up $62 on average, having increased by 26% ($14) since early year. According to the UN Food and Agriculture Organization, while global food prices increased by 3.4% in January – February, they are y/y below by 2.2%.

Average inflation in trade partners has remained stable over recent months, no sharp fluctuations were witnessed in their currency exchange rates.

Strategic foreign exchange reserves have increased by 4.1% since early year to $46.6 B, attributable to balance of payments surplus.

Economic activity. The economic growth rate continues to rise at the beginning of 2019. In January 2019 economic growth rate y/y was 2.9%. Non-oil economic growth was 2.7%, driven by trade. The non-oil industry grew by 12.9%, agriculture by 2.4%.

The business confidence index based upon real sector monitoring by the Central Bank has increased in non-oil processing and trade, and decreased in construction and services over recent 2 months.

Widening domestic demand is expected to have a downward effect on output gap over the remaining period of the year.

Inflation risks. Developments of the past period of the current year and updated outlook suggest that the risk balance of inflation is undergoing certain structural changes.

Stabilizing factors include the sustained exchange rate, anti-inflationary monetary condition, and low inflation expectations, anchoring on a low level, on the backdrop of the balance of payments surplus.

External and internal factors of inflation are also kept in mind. External factors mainly include volatile oil prices related to high supply probability in global oil markets amid slowdown in global economic growth. On the other hand, ongoing price hike trend in global commodity markets increases the risk of inflation import. Uncertainties related to changes in inflation and exchange rates in trade partners are still on air. Domestic factors mainly include direct and indirect effect of fiscal stimuli and financial sector related decisions on the consumer market and the monetary sector.

Monetary condition. Recent successive decisions on monetary policy easing contributed to the normalization of the monetary condition. Shaping of the monetary condition by the Central Bank serves to maintaining an optimum balance between the inflation target and output gap.

No significant change has occurred in money base in manat since the last Board meeting on the monetary policy, money base in manat reacted to changes in the balance of government accounts.

National currency denominated savings are still attractive aided by decreasing behavior of dollarization in the environment of positive zoning of real interest rates and extension of full deposit insurance. 

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 Management Board of the Central Bank on the interest rate corridor parameters will go public on 26 April 2019.