13 December 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 7.5% from 7.75%. The ceiling and the floor of the interest rate corridor were set at ±1.75% range to the refinancing rate (9.25% and 5.75%).

Since the last meeting of the Management Board dedicated to the monetary policy, the annual inflation has not deviated from the projected trajectory and remained below the target band center.

Despite the impact of a number of domestic and external factors, inflation expectations remain stable. Given recent trends, the Central Bank revised its inflation forecasts down for the end of 2019. This relates to the fact that in the short-term period stabilizing factors remain dominant in the balance of inflation risks. In the medium term, inflation risks make it necessary to keep real interest rates in a positive zone.

Next decisions on the interest rate corridor will be taken depending on the degree of deviation of actual inflation from the declared target, changing macroeconomic conditions and the likelihood of realization of risks.

Inflation. Since the Board's last meeting dedicated to the monetary policy there have been no considerable fluctuations in consumer price dynamics. Official statistics suggests that annual inflation was 2.6%, close to the band floor in November.

In total, the price of 8.8% of products included in the consumer basket remained unchanged and that of 15.4% fell over the last 12 months. The rise in prices of 46.4% of products and services was less than 2%.

In November, the price index on food products with significant share in the consumer basket increased by 4.8% y-o-y. Higher growth trend in global food prices is amongst the key factors affecting domestic food inflation through the inflation import channel. Global food prices rose by 2.7% in November relative to the previous month and 9.5% y-o-y. On the other hand, seasonal factors have an upward impact on prices of some domestic agricultural products.

Lower annual growth rates for non-food products and services (1% and 0.9% respectively) have a restrictive effect on overall inflation.

Favorable external conditions, stability of bilateral and multilateral exchange rates, adequate monetary conditions, dynamics of administrative prices and low inflation expectations are the key factors supporting the low level of overall inflation.

The low level of actual inflation and the sustainable exchange rate of the national currency enable inflation expectations to remain stable. Real sector monitoring findings suggest that three-month price expectations were prone to decline in the non-oil refining industry, construction and service sectors, and prone to growth in the trade sector, while the index was in a negative zone as a whole in November compared to the previous month.

Given recent trends, the Central Bank has made downward adjustment in its inflation forecasts for the end of this year. Updated forecasts show that inflation will be in the range of 2.8-3% as of the end of 2019. Amid existing macroeconomic trends, no significant changes are expected in the dynamics of inflation in 2020.

Monetary conditions. Since the last meeting of the Board, monetary conditions have continued to soften, thereby contributing to changes in aggregate demand in line with the economy's potential. The growth rate of money supply in Manats reached 14%, primarily due to budget spending using a single treasury account.

Despite the downward effects of monetary easing on deposit rates, the 26.9% increase in AZN deposits of individuals over the first 11 months of 2019 demonstrates attractiveness of savings in the national currency. The dollarization of deposits of individuals decreased from 62.5% of early year to 54.1% in November, and from 54.6% to 49.5% respectively for resident individuals.

Monetary policy easing has also had a considerable positive effect on credit activity. Lending (including banks and non-bank credit institutions) increased by 16.1% since early year, including loans to households by 21%, and loans to legal entities - by 11.6%.

Economic activity. The economic growth rate continues to rise. According to official statistics, real economic growth made up 2.1% y-o-y in January-October of the current year. Economic growth was 3.6% in the non-oil sector, primarily driven by the trade sector. The non-oil industry grew by 15.7%, and agriculture by 7.3%.

Key factors of the increase in domestic demand are higher social expenditures of the government and gradual rise in credit activity. Amid expanding socially oriented fiscal incentives, the nominal income of the population increased by 6.9% y-o-y over the 10 months, which in turn significantly exceeds the annual inflation.

The RSM-based business confidence index increased in the non-oil industry, trade and construction, remaining slightly stable in services (seasonal factor) in November relative to the previous month.

Favorable international conjuncture and increased export potential of the non-oil sector allow maintaining a large surplus in the external trade balance. Over the last month, global oil price was prone to rise. The average price for Brent crude oil for 11 months was USD 64.1 per barrel. Albeit this is below the average for 2018 (USD 72), it provides a significant trade surplus. Initial figures suggest that over the first 11 months of this year, exports increased by 2.3% y-o-y, including non-oil exports by 17.5%, and non-oil imports, excluding monetary gold imports, by 9%.

Amid balance of payments surplus, the strategic foreign exchange reserves of the country have increased by 12.7% or USD 5.7 billion since early year.

Inflation risks. No significant changes have occurred in the risk balance of inflation since the Management Board's last meeting dedicated to monetary policy. Balance of payments surplus, sustainable exchange rate, adequate monetary conditions and low inflation expectations have a stabilizing effect on prices.

Medium-term risks are mainly driven by the external sector - the slowdown in global economic growth and its possible impact on energy prices, and the ongoing rise in the global food market. According to recent estimates of the International Monetary Fund, the global economic growth rate has fallen to its lowest level since the global financial crisis. The Fund revised its global economic activity growth rates down for the next year and mid-term period. Domestic risk factors include higher money supply driven by increased budget spending, and higher consumer loan inflation. Even in the medium-term, rule-based fiscal policy, closely coordinated with monetary policy, will remain one of the key conditions for sustainable price stability.

The Central Bank will take decisions on the interest rate corridor based on the degree of harmony of actual and target inflation, changing macroeconomic conditions and the likelihood of risks occurring.

The decision takes effect on 13 December 2019. Next decision by the Management Board of the Central Bank on the interest rate corridor parameters will be publicly disclosed on 31 January 2020.