30 October 2020, Baku:The Management Board of the Central Bank of the Republic of Azerbaijan decided to keep the refinancing rate unchanged at 6.5%. The floor of the interest rate corridor was kept at 6%, while the ceiling at 7%.

Inflation dynamics and inflation expectations. Since the last meeting of the Management Board dedicated to the monetary policy, the annual inflation has decreased and remained below the center of the annual inflation target band. According to official statistics, annual inflation in September was 2.6% amid weak aggregate demand.

Over the past year, the prices of 9.2% of products included in the consumer basket remained unchanged, while the prices of 10.8% fell down. The price increase of 55% products was less than 2%.

Price changes in the main sub-categories of the consumer basket show different dynamics. 

Food inflation was 4.3% per annum. The slowdown in domestic food inflation came amid rising global food prices by 5% over the past 12 months.

Prices for non-food products remained unchanged in the last month, service prices increased by 0.1%. The annual change in prices for non-food products and services was 1.4% and 1.2%, respectively.

Inflation expectations have changed in different directions by sector. Monitoring of real sector enterprises displays that inflation expectations in September increased in the non-oil industry and trade vs the previous month, decreased in the service sector, and remained almost unchanged in the construction sector. According to a household survey conducted in September, the share of respondents expecting inflation to increase was 25%, which is 7 percentage points lower than in June. In general, inflation expectations for all economic entities are close to the actual indicators.

According to the forecasts updated in October, by end 2020 inflation is expected to range between 2.8-3% and 3.6-4% by end 2021, while maintaining the existing macroeconomic framework. Along with the monetary conditions, the dynamics of inflation in the forecast horizon will significantly depend on the implementation of fiscal policy.

Global environment and external sector indicators. The process of restoring economic growth in the world is slow, which has a negative impact on world commodity and financial markets. In October, the International Monetary Fund revised the forecast for the dynamics of the world economy to positive. According to updated forecast, the global economy is expected to shrink by 4.4% in 2020. However, the worsening of the epidemiological situation in the world and the restrictive measures taken by national governments may adversely affect the realization of this forecast. In this context, the recession is deepening in trade partner countries, and the scale of fluctuations in global financial and FX markets is significantly expanding.

From the beginning of the year, the country's foreign trade balance remains in surplus. This creates conditions for the protection of strategic foreign exchange reserves. At present, the strategic foreign exchange reserves are more than $50 B, which is more than 100% of the annual GDP. Foreign exchange reserves of the Central Bank has increased by 3.4% since early year.

Monetary condition. The change in most monetary indicators shows that the monetary situation has significantly relaxed since the last meeting.

By the end of this year, the monetary base is expected to expand through the state budget channel. The broad money base in manat has increased by 1.8% in the last month and 1% since early year. Credit investments in the economy increased by 1.9% in the first 10 months of this year, including business loans increase by 2.6%.

Interest rates on deposit operations and short-term notes of the Central Bank have decreased since the last meeting and are close to the lower limit of the interest rate corridor. Under such conditions, the average interest rates and return on government securities in the interbank market continue to decline.

Credit rates on newly issued loans have decreased since the last meeting. Despite the easing of monetary policy, the expansion of internal and external risks limits the possibility of reducing deposit and credit rates.

The extension of macroprudential regulatory incentives to support pandemic-affected businesses and the financial sector until 1 January 2021, provides additional support for the transmission of monetary easing and the improvement of real sector lending.

The FX market has remained stable since the last meeting and the exchange rate of the manat has remained stable.

Economic activity. Uncertainties prevent the national economy from reaching its full potential. According to official statistics, on results of the first 9 months in the current year, GDP decreased by 3.9% in real terms, and 2.4% in the non-oil sector, amid weak domestic and foreign demand, as well as limited supply due to the pandemic. The non-oil industry, one of the leading sectors of the economy, grew by 10.5% and the economic growth in agriculture was 1.5%.

For the rest of the year and the following year, economic activity will be supported by stimulating fiscal and monetary policy and ongoing macroprudential relaxation. These factors support the realization of forecasts that real economic growth will move to a positive zone in 2021. The success of economic recovery based on sustainable factors will depend significantly on the continued maintenance of macroeconomic stability. Large-scale economic rebuilding in the liberated areas will also have a positive impact on economic growth.

Inflation risks. The risk balance varies mainly depending on the epidemiological and geopolitical conditions.

Infliation risks mainly include a significant increase in fluctuations in the global energy market and financial markets of partner countries with a deterioration in the prospects for the global economic recovery amid repeated re-tightening of restrictions due to the second wave of the pandemic, an escalation of geopolitical tensions in the region, continuation of the trend of rising food prices and monetary expancion expected by the end of this year through fiscal channels.

On the other hand, price stability is supported by weak external and domestic demand, negative aggregate output deficit, stability of regulated prices and economic policy framework aimed at maintaining macroeconomic stability.

Next interest rate corridor parameters related decision will be taken in November-December, taking into account the updated inflation forecasts, the dynamics of macroeconomic indicators, changes in the risks arising from the pandemic and other areas.

This decision will be effective on 30 October 2020. The next decision of the Management Board of the Central Bank on the interest rate corridor parameters will go public on 18 December 2020.