29 January 2021, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to leave the refinancing rate unchanged at 6.25%. The floor of the interest rate corridor was maintained at 5.75%, and the ceiling at 6.75%.
The decision was taken in light of rebalancing of inflationary and anti-inflationary factors in the medium term. A pause in monetary easing in terms of value relates to the assessment of existing uncertainties and the potential for changes in the refinancing rate.
Next interest rate corridor parameters related decisions will depend on the actual inflation rate and inflation expectations, economic activity recovery rate in a forecasting horizon, probabilities for the realization of internal and external risks and their translation to financial markets.
Inflation. According to official statistics, in December 12-month inflation was 2.6%, lower than the rate forecasted for 2020. Price changes for the main sub categories of the consumer basket vary. Price hike is still driven by food. Food inflation has been 4.6% over recent 12 months. Rising world food prices have also affected domestic food prices. The 12-month increase in prices for non-food products and services was around 1%.
Inflation expectations remain stable. According to real sector monitoring, inflation expectations remained stable in trade, construction and services in January vs the previous month. Prices are expected to rise in the industry.
According to forecasts updated in January, inflation is expected to be around 4% end-2021. Inflation was revised up in light of expectations of rising aggregate demand with the support of stimulating fiscal policy and one-time factors.
External sector. İmprovement in the external balance supports the exchange rate, main macroeconomic stability anchor, and has a stabilizing effect on inflation expectations. Launch of vaccination against the COVID-19 is increasing global economic recovery-related optimism. According to the IMF World Economic Outlook January Update, the global economy is expected to grow 5.5% in 2021, 0.3 pp up compared to the previous update. However, uncertainties remain concerning the global economy and stability in global markets amid unequal sectorial effects of the pandemic in general, limited access to vaccines in some countries and political tensions. Per capita income in a number of economies of the world is expected not to reach the pre-pandemic level even in 2022.
Global economic growth outlook related optimism is weighing on the global oil market. Oil prices have been prone to rising since the last meeting. While average Brent oil price was $43 in 2020, this number increased to $55 over the past period of January.
Azerbaijan’s strategic FX reserves increased by 0.3% to $51.4B amid trade surplus in January 2021.
In general, improved external sector indicators, the adopted macroeconomic framework and foreign exchange reserves exceeding GDP are the key conditions for exchange rate stability, the main macroeconomic stability anchor.
Economic activity. Starting from 2021 rising aggregate demand, including stronger consumer and investment optimism have the potential to translate to inflation expectations.
Due to synchronized anti-crisis measures, the rate of decline in the non-oil sector is lower than in many partner countries. According to findings of real sector monitoring, the business confidence index in January tended to increase compared to the previous month in construction, while remained stable in the non-oil industry, trade and services.
In 2021 economic growth is expected to gradually recover, supported primarily by stimulating fiscal policy, maintenance of an loose monetary environment, construction works in the liberated territories and realization of postponed demand. Expectations that the epidemiological situation will improve due to the rise in external demand and the effect of vaccination also raise growth prospects related optimism.
Monetary condition. The monetary condition is expected to remain loose. Low interest rates on short term tools in various segments of the money market since the last meeting related to an accommodative monetary policy by the Central Bank on the one hand, and high liquidity in the banking system on the other. To more effectively manage liquidity in circulation as part of macroeconomic stability targets since early 2021 the range of Central Bank’s sterilization tools have been increased; a decision was taken to launch auctions on placement of 84, 168 and 252-day notes, along with 28-day notes.
Change in the balance of a single treasury account contributes to money supply. As in previous years fiscal channels are expected to have an upward effect on the money base in 2021 as well.
To support pandemic affected businesses and households, including the banking system extension of macroprudential relief up to April 2021 also has an additional easing effect on the monetary condition, lending activity in particular.
Risks balance. Whereas the role of the factors with an upward effect on inflation has increased since the last meeting, the balance of risks is balanced and allows to say that inflation will remain within the target band. In the medium-term forecast horizon the factors with upward and downward effect on inflation balance each other. The upward effects primarily include the expectations on rising economic activity from the second half of the year. The stimulating fiscal policy underway and current accomodative monetary condition, the realization of postponed income support recovery of economic activity. On the medium-term forecast horizon the effect of certain internal and external factors on prices is not ruled out. At the same time, vulnerabilities in global commodity and financial markets maintain a potential to affect inflation expectations.
The stabilizing effects mainly include the adopted macroeconomic framework. Oil transfers provided for in the state budget in the current year and FX reserves underpin this framework. There is a probability that recent improvement in foreign sector indicators with the upward trend in oil prices will have a positive effect on exchange rate expectations. The possible continuation of thrifty consumption behavior during the pandemic could also have a reducing effect on inflation in the medium term.
Refinancing rate related next decisions will be taken in light of the adequacy of the dynamics of forecast of inflation with the target, effects of fiscal and monetary policies, and the level of recovery of consumer demand.
The decision takes effect on 29 January 2021. The next decision of the Management Board of the Central Bank on the interest rate corridor parameters will be announced on 19 March 2021.