18 September 2020, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to shift the refinancing rate from 6.75% to 6.5%. The floor of the interest rate corridor was set at 6%, while the ceiling at 7%.

This decision was oriented towards maintaining inflation within the target band (4±2%), accelerating the process of recovery. The accepted refinancing rate allows to keep the dynamics of inflationary developments under control in the short and medium run.

Next interest rate corridor parameters related decisions will depend on the risk balance on inflation in the short and medium term, the trajectory of actual inflation, the international conjuncture and the situation in the FX market.

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. According to official statistics, amid shrunk aggregate demand prices decreased by 0.2% in August, annual inflation was 2.8%. Monthly deflation was driven by cheapening of food. Food prices slided by 0.5% in August due to seasonal factors. Prices for non-food products and services remained unchanged inertially. In general, the dynamics of actual inflation was in line with forecasts.

Monitoring of real sector enterprises displays that inflation expectations keep decreasing. In August 2020 inflation expectations decreased in the non-oil industry and services vs the previous month, and nearly unchanged in construction and trade. However, conducted surveys suggest that inflation expectations are sensitive to external and internal environment factors.

Inflation forecast was revised down, driven by deflation in July and August. According to forecasts updated in September, by end-2020 inflation is expected to range between 3-3.2%, below the target band.

Global environment and external sector indicators. The external environment remains uncertain. Although there has been some improvement in global economic activity with the partial easing of the quarantine regime in many countries, the recovery process is very slow against the backdrop of the expectations of the second wave of the epidemic.

Fluctuations in global financial markets, including FX markets of trade partners, rose again early September.

Volatility on global commodity prices has increased. Whereas average Brent oil price was $45 in August, it slided to $42.1 over the past period of September. Continuation of the quarantine regime in many countries around the world hinders ongoing recovery of demand for oil.

Despite low oil prices, foreign trade of the country has been in surplus since early year, allowing strategic foreign exchange reserves increase – presently $51.4 B, 0.6% up vs early year. Foreign exchange reserves of the Central Bank has increased by 3.7% since early year.

Monetary condition. On the backdrop of ongoing pandemic monetary policy decisions and macro prudential regulatory concessions ease credit conditions and ensure that economy's liquidity needs are met.

While the money base has contracted by 1% since early year, it increased by 3% since end-July. Growth of the monetary base related to public expenditures from the treasury account is expected to accelerate significantly last quarter of the year. However, growth of the money base amid pandemic is not accompanied with an expansion of aggregate demand and credit.

In the environment of excess liquidity in the banking system interest rates on Central Bank’s deposit operations and short-term notes, as well as return on government securities are falling. Deposit and credit rates are balancing between risk premiums and easing monetary conditions.

Term deposits of individuals increased in August, while real interest rates remained positive. Credit investments also continued to grow last month.

The FX market has remained stable since the last meeting. Increasing transfers from the Oil Fund with the adjustment of the state budget will provide additional support to the balance in the FX market in 2020.

Economic activity. The rate of economic decline in the non-oil sector has slightly slowed down due to relative easing of restrictions. According to official statistics, while the bottom of real decrease on non-oil GDP was 2.5% (on results of 6 months), it was 1.7% on results of 8 months in the current year.

Although monitoring of real sector enterprises showed that the business confidence index remained negatively zoned, there was an increase in most areas compared to last month's historical minimum.

Over the remaining period of the year economic activity will be supported by the counter cyclic fiscal policy, monetary easing and synchronized anti-crisis measures.

Inflation risks. The main factor affecting the balance of risks is a high level of uncertainty about the future of the pandemic. External risks mainly include further slump in oil prices due to the possibility of a second wave of COVID-19, recession and exchange rate fluctuations in some partner countries. The main internal risks are changes in inflation expectations as these trends intensify, as well as potential effects of liquidity over recent years, mainly as a result of monetization of fiscal deficit. However, existing counter cyclic macroeconomic framework provides additional opportunities to manage these risks.

Next interest rate corridor parameters related decisions will be taken in light of changes in the balance of risks and macroeconomic stability targets.

The next decision of the Management Board of the Central Bank on the interest rate corridor parameters will go public on 30 October 2020 accompanied with the related press-conference.