30 July 2020, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to shift the refinancing rate from 7% to 6.75%. The floor of the interest rate corridor was set at 6.25%, while the ceiling at 7.25%.

Next interest rate corridor parameters related decisions will depend on deviation of actual inflation from the forecast, changes in global markets, as well as recovery of domestic demand and economic activity.

Inflation and inflation expectations. Since the last meeting of the Management Board dedicated to the monetary policy annual inflation has remained below the center of the annual inflation target band. Amid shrunk aggregate demand and its anti inflationary effects, there was 0.3% deflation in June, and annual inflation was 3%.

Under seasonal factors in July food prices slided by 1.5%, prices for non-food products hiked by 0.1%, and services by 0.9%.

Monitoring of real sector enterprises displays that inflation expectations keep decreasing. In July-September 2020 inflation expectations continued declining in industry, services and trade. According to the survey among households conducted in June the share of respondents who expect inflation to rise decreased by 3 pp to 29% compared to March.

Inflation forecast was left unchanged based upon July analysis across inflation factors. According to recent forecasts, inflation is expected to range 3-3.5% by the end 2020 within the frames of existing fundamentals.

Global environment and external sector indicators. Since the last meeting on monetary policy the indicators that characterize global economic activity have undergone no considerable changes. Whereas the business and consumer confidence indexes across the OECD countries that contribute to over 60% of global GDP slightly increased in June compared to May, they are significantly lower than early year. The IMF revised its global economic recession forecast for 2020 up from 3% to 4.9% in June.

Global commodity prices, including oil prices are recovering. Over the past period of July average Brent oil price has been $43, 59% up vs April ($27).

Better international conjuncture of the recent month and still low import had an upward effect on external balance indicators. In general, foreign trade surplus of recent 6 months amounted to $2.7B.

Strategic foreign exchange reserves keep increasing – currently $51.7B, 1.2% up vs early year. Foreign exchange reserves of the Central Bank have increased by 3.3% since early year. 

Monetary condition. The monetary condition has largely eased since the last meeting, driven by downward changes in interest rate corridor parameters in June, measures taken to support lending, as well as drop in the balance of a single treasury account related to state budget expenditures. Money base has increased by 3.6% since end-June. While money supply started to increase, interest rates varied across financial market segments.

Interest rates on deposit operations and short term notes of the Central Bank, as well as government securities yield declined under the effect of monetary policy decisions over the recent month. The fact that demand exceeds supply in auctions on these financial instruments indicates that liquidity is generally high. Drop in average interest rates in money markets shows the effectiveness of the first loop of monetary policy transmission.

Since the last meeting the main factor to affect deposit interests has been the rise in the maximum interest rate on insured deposits. Interest rates on manat denominated deposits considerably prevail over actual and forecasted inflation, contributing to attractiveness of savings in the national currency and de-dollarization.

Pandemic driven high risks in the real sector and their evaluation by banks largely translate into loan interest rates. Central Bank’s monetary policy decisions and drop in interest rates in the money market pave the way to easy credit conditions in the period to come. Regulatory easing and introduction of concessional government lending mechanisms to support pandemic-affected economic agents will also improve access to financial resources.

Economic activity. Pandemic related necessary restrictions had a negative effect on economic activity in June-July as well. Real sector monitoring displays that business confidence index remained negatively zoned in the non-oil industry, construction, trade and services in June. The June survey among households suggest that the consumer confidence index declined. 

On the backdrop of decline across all aggregate demand components, according to official statistics, while economic growth continued in the oil-and-gas industry and agriculture over 6 months of the current year, the base areas of the economy, in general real GDP decreased by 2.7%, and 2.5% on the non-oil sector.

Implementation of concerted anti-crisis actions by the Government and the Central Bank, in particular support for pandemic-affected areas helped considerably reduce the scale of decline in economic activity. In the environment of lingering virus threat and social isolation measures economic growth is forecast to approach its potential gradually, as in the global economy. 

Reduction of the refinancing rate, forecasted expansion of money supply over the remaining part of the year will have an upward effect on aggregate demand recovery and support for economic activity and employment.

Inflation risks. In the short run stabilizing factors in the inflation risk balance still prevail.

Weak pandemic-driven aggregate demand will act as the key anti-inflationary factor in upcoming months. Shrunk aggregate demand contains import and consequently demand in the FX market. However, disruptions in logistic chain, as well as additional expenses by economic agents to fight coronavirus may have an upward effect on prices.

Significant uncertainties remain in the global environment over the medium term with respect to the duration and effects of the pandemic. Over this period, macroeconomic and financial stability in the national economy will depend on formation of a new macroeconomic framework and effective policy coordination that will meet the new challenges and recover economic growth and employment.

The decision takes effect on 30 July 2020. The next decision of the Management Board of the Central Bank on the interest rate corridor parameters will be announced on 18 September 2020.

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