19 June 2020, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to shift the refinancing rate to 7% from 7.25%. The floor of the interest rate corridor was set at 6.5%, while the ceiling was set at 7.5%.

This decision was taken in light of low annual inflation and lingering stability in the FX market, relative improvement of international conjuncture, weak consumer demand and its effect on inflation expectations since the last meeting dedicated to the monetary policy.

Next interest rate corridor parameters related decisions will be oriented towards maintaining optimum balance between keeping inflation within the announced target band, safeguarding financial stability and supporting economic activity priorities.

Dynamics of inflation and inflation expectations. Annual inflation rate has decreased since the last meeting dedicated to the monetary policy. According to official statistics 0.5% deflation was recorded in May, annual inflation was 2.9%.

Over recent 12 months, inflation has been 5.7% on food products, 1.4% on non-food products and 0.4% on services. Shrunk aggregate demand, driven by decrease in consumption and investment expenses on the backdrop of pandemic triggered uncertainties, acts as the main disinflationary factor. Seasonal cheapening of agricultural products and ongoing drop in global food prices (10.5% over 5 months of 2020) also weigh on drop in food inflation.

Findings of real sector monitoring indicate that inflation expectations decreased over the recent month. According to the findings of the May survey, inflation expectations decreased on the non-oil industry, construction, trade and services vs the previous month.

According to forecasts updated in June the most probable inflation will be 3-3.5% (within the target band (4±2%)) as of end-2020 if current macroeconomic framework remains. Forecasts will be regularly updated over the remaining period of the year depending on economic developments.

Global environment and external sector indicators. Since the last meeting dedicated to the monetary policy, relative ease of lockdown in most countries, as well as broad fiscal and monetary incentives sent positive momentum to economic recovery and markets. However, due to negative effects of the coronavirus pandemic global economic activity indicators are still close to historical lows of recent decades.

As a result of relatively high demand, as well as new OPEC++ deal end-April oil prices started to recover. Over the past period of June average Brent oil price was $40, 23% higher than average price in May ($32.5), and 48% higher than average price in April (27.1$).

Although over 5 months of the current year exports y/y decreased by 19%, foreign trade balance still was in surplus. Low import trends rebalance foreign trade balance. Given the above, it is not excepted that the current account of the balance of payments will be in surplus on results of the first half year.

Monetary condition. Since the last meeting state budget expenditures from a single treasury account, regulatory relief introduced to support the population and businesses along with monetary poilicy decisions have weighed on liquidity and crediting conditions.

The situation in the FX market remained stable in May too. Supply prevailed over demand at auctions held by the Central Bank, demand was mainly driven by import. Stabilized situation in FX markets of main trade partners of Azerbaijan is accompanied with stabilization of the dynamics of the nominal and real effective exchange rates of the manat.

Money base has increased by 8% since April, and decreased by 10.6% since early year.

The Central Bank applied its monetary policy tools within the frames of the interest rate corridor parameters. Demand prevailed over supply at auctions organized by the Central Bank on attraction of deposits and issue of short-term notes, return on these tools approached the floor of the corridor.

Interest rates on new savings and deposits in the manat, as well as interest rates on newly issued loans over the recent month varied across individuals and legal entities. Rise in the maximun interest rate on insured manat denominated deposits from June 1 onward is expected to positively translate into de-dollarization.

Actions taken to support the population and businesses, including implementation of appeals on restructuring of loans, subsidization of interest rates and expanded guarantee support allow to ease lending terms and conditions amid the pandemic.

Economic activity. Negative effects of the pandemic in the internal economic activity continued in May-June. Central Bank’s real sector monitoring findings display that, the business confidence index was negatively zoned in the non-oil industry, construction, trade and services.

According to official statistics, economic growth continued in basic areas of the economy (non oil-and-gas sector and agriculture) over 5 months of the current year.

All aggregate demand components decreased. In January-May retail trade turnover y/y decreased by 1.7%, and value of paid services to the population decrased by 14.9%. Non-oil investment decreased by 16.7%.

Full discharge by the Government of its social expenses related obligations and additional support measures and synchronized macroprudential actions prevent further drop in economic activity and allow to partially compensate income of economic agents.

Inflation risks. The risks balance of inflation is currently related to pass-through of the pandemic to global economic activity and the Azerbaijani economy. Uncertainties on how deep and durable these effects are, remain high. The main external environment related risk is another slump in oil prices, likely to be triggered by the second wave of the COVİD-19 contagion, worsened economic-trade ties between the USA and China and socio-political tensions in particular countires. Under the condition of new economic normalities re-balancing of the national economy has been kicked-off. Rebalancing should allow to smooth pass-through of changes in the external environment to the internal environment, and maintaining the balance between supporting economic activity and employment and financial stability.

When taking next decisions on the parameters of the interest rate corridor changes in the risks balance, and coordination of macroeconomic stability targets with ecoinomic activity support will be prioritized. The Central Bank will further take all possible actions to safeguard macroeconomic and financial stability in the country and maintain inflation within the announced band.

The decision takes effect on 19 June 2020. The next decision of the Management Board of the Central Bank on the interest rate corridor parameters will be announced on 30 July 2020 accompanied with a related press-conference.