13 September 2019, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate by 25 basis points to 8 from 8.25%. The ceiling and the floor of the interest rate corridor were set at ±1.75% range to the refinancing rate.

Actual inflation is below the center of the target band, no considerable changes are observed in dynamics of short-term inflation expectations. According to updated forecasts, as of end-2019 inflation will remain within the target band (4±2%), though a bit higher than its center.

Analysis of the risk balance suggests that in the medium term horizon external factors are more threatening for inflation than internal factors. External factors mainly include global trade and currency tensions, and higher uncertainty in global commodity markets amid worsened global growth prospects. The Central Bank will keep monitoring these risks and adequately use tools in its disposal to maintain inflation within the target.

Next monetary policy decisions will be taken in light of compliance of actual and forecast inflation with the target band depending on effects of the realization of external and internal risks on inflation. 

Inflation. Since the last meeting of the Management Board dedicated to the monetary policy price hike has subdued; according to official statistics, annual inflation stood at 2.4% in August. Food prices (4.7%) are higher than overall inflation, non-food prices (1.2%) and prices for services (0.1%) are below the center of the band. The rising dynamics of food prices is driven by increase in certain food prices in the global market that have a high pass-through capacity. In general, both total inflation, and its components are within the target band.

On the backdrop of revival of consumption, the key component of aggregate demand, and rising prices for certain commodities in the global market, the monetary condition, stable bilateral and multilateral exchange rates and seasonal factors have a stabilizing effect on inflation.

According to real sector monitoring (RSM) findings, price expectations decreased in trade, services and construction, and increased in non-oil processing in August.

Amid rising fiscal expenses, one of the main components of aggregate demand, and expanding consumption trends inflation is expected to be within the target band (4±2%) as of end-2019. Medium term inflation rate will depend on the scale of realization of external and internal risks.

Monetary condition. Monetary condition keeps approaching neutrality. Money base in manat has increased by 6.6% since early year. The trajectory of money base is driven by the change in the balance of single treasury account and Central Bank’s sterilization portfolio.

Monetary easing has a downward effect on credit and deposit rates in the money market. Interest rates in the state securities market swing in parallel to the parameters of the Central Bank’s interest rate corridor.

Economic activity. In January-July 2019 real GDP increased by 2.5%. Non-oil sector grew by 3%, stemming from trade. The RSM-based business confidence index increased in the non-oil industry, decreased in trade and remained unchanged in services and construction last month.

In the environment of wider consumption and non-oil investments most preventive cyclic indicators are prone to rising.

Foreign trade balance was in surplus amid recent oil prices ($65 over the past period). According to initial data, over 8 months export increased by 5.1%, including 15.4% rise in non-oil export, growth rate of non-oil import was 11.7%, excluding monetary gold.

Supply prevailed over demand in the FX market amid the balance of payments surplus.

Strategic foreign exchange reserves of the country have increased by 10.5% ($4.7B) since early year to $49.4B.

Global food prices hiked by 5.1%, including 10.7% on meat products, 14.4% on dairy products since early year (source: UN Food and Agriculture Organization).

In general, prospects of weaker global economic activity, slowdown in economic growth in partner countries and falling export prices may threaten economic growth in Azerbaijan pushing external demand factors.

Inflation risks. In the short run forecast horizon the main factor to affect inflation is widening of consumption, the key component of aggregate demand. On the backdrop of higher fiscal stimuli and activated consumer lending consumption and import may widen more considerably. High money supply in parallel with fiscal expansion impact inflation.

In mid-term risk factors may flow from the external sector. Ongoing global trade and currency tensions boost risks of slowdown in global economic activity. In such an environment, global oil price swings have been deepening over recent months.

The decision is taking effect on 13 September 2019. Next disclosure by the Management Board of the Central Bank on the interest rate corridor parameters will go public on 25 October 2019 followed by a scheduled press conference on the same day.