19 March 2021, Baku:  The Management Board of the Central Bank of the Republic of Azerbaijan decided to leave the parameters of the interest rate corridor unchanged – the refinancing rate at 6.25%, the floor of the interest rate corridor at 5.75%, and the ceiling at 6.75%.

This decision was taken in light of recent trends on inflation fluctuations and possible pass-through of cost and demand factors to prices in the short- and medium-term. The conducted analyses display that there is no considerable change among factors in the balance of risks. Stabilizing factors – rising oil prices, better external balance, the stability of the exchange rate, and weak recovery of economic activity balance increasing factors – rising global food prices, counter-cyclic fiscal policy and expected monetary expansion. While non-monetary inflation slightly increased, the core inflation is still stable. Inflation is predicted to remain within the target band of the Central Bank as of end-year.

Next interest rate corridor parameters related decisions will depend on a comparison of actual and forecasted inflation with the target parameters and changes in the balance of risks on a medium-term forecast horizon.

Inflation. Although annual inflation has increased since the last meeting of the Management Board dedicated to the monetary policy, it remained within the target band. According to official statistics, in February the consumer price index rose by 1.6% vs the previous month and by 4.2% year-on-year. Inflation was driven mainly by cost factors – rising global commodity prices and certain administrative prices. The role of hiked non-food and service prices in inflation relatively elevated.

Average annual core inflation calculated by excluding swings in regulated prices and prices for seasonal agricultural products was 2,1% in January - February.

There is no significant change in inflation expectations. According to findings of real sector monitoring inflation expectations in February remained stable in trade and services vs the previous month. Non-oil inflation expectations relatively subdued after a rise in January. The trend of falling price expectations in construction continued.

According to forecasts updated in March, inflation is expected to be within the announced target band as of end-2021 in light of the current monetary policy.

External sector. External conditions translate to the national economy and inflation in the country differently.

Rising global oil prices have an upward effect on the balance of payments and support balance in the FX market. Under the influence of the OPEC++ deal and global recovery expectations average oil prices over the past period of 2021 exceeded $60 and $67 over the past period of March. Leading analytical think tanks relatively increased oil consumption and price forecasts in their recent releases.

Ongoing hike in global food prices has a rising effect on internal inflation. Global food prices hiked by 6.9% in January-February and by 16.7% over the recent 12 months. The highest price hike was in oils (51%) and cereals (26.5%). Imports and sales of wheat, production and sale of wheat flour and bread were exempted from VAT for another year to reduce the impact of rising wheat prices on domestic inflation.

Growth recovery in the global economy and partner countries is expected to translate to the dynamics of demand through non-oil export and investment flows. On the other hand, more active use of the established international transport infrastructure and the entry into force of the Preferential Trade Agreement between Azerbaijan and Turkey on March 1 is expected to have a positive impact on the expansion of country's non-oil exports. 

The situation in the financial markets of trade partners has been stable since the last meeting. Monetary easing stopped in most of those countries.

Economic activity. Expectations for recovery of economic growth in 2021 are already justified in the non-oil economy. According to official numbers, in January-February 2021 non-oil recession nearly stopped. Leading non-oil sectors – the non-oil industry grew by 12.1%, agriculture by 2.3%, transport and warehousing by 10.9%.

According to real sector monitoring findings, in February the business confidence index was prone to rising in trade and services vs the previous months. There was a positive trend in the orders received for construction.

Both foreign and domestic demands are expected to continue to recover in the short- and medium-term horizon. Domestic demand will be supported by stimulating fiscal, monetary and macroprudential policies and restoration works in unoccupied territories.

 Monetary condition. The monetary condition has undergone no considerable changes since the last meeting.

Change in the balance of a single treasury account was the main factor of change in money supply. Decline in money base since an early year is temporary and is attributable to budget surplus. For the rest of the year, replacement of this surplus with deficit will be accompanied by an increase in the money base.

The yield on securities has slightly increased since the last meeting, while yield on the Central Bank notes remained unchanged. Interest in the interbank market, as well as interest on loans and deposits mainly remained stable. The fact that nominal interest rates remain unchanged against the background of rising inflation means a decrease in real interest rates.

Credit to the economy started to resume. In January-February bank credits increased by 0.6%; business loans by 0.6%, mortgage loans by 3.2%. Consumer loans decreased by 0.7%. Credits are expected to grow in parallel with economic activity. Government's continued privileged lending programs and macroprudential easing will further support this growth.

One of the key conditions for inflation expectations to remain stable is the FX market stability. At currency auctions in February-March the size of demand was much lower than in January. 

Risks balance. There has been no considerable change in the balance of risks of inflation since the last meeting. On a medium-term forecast horizon factors with falling and rising effect on inflation keep balancing one another.

Improved international conjuncture, in particular the rise in oil prices supports the main policy anchor - exchange rate stability. Possible continuation of new consumer behavior during the pandemic may also limit price increases for some products and services.

The containing impact of aggregate demand and economic activity on inflation is gradually disappearing. Cost factors, such as rising global food and administrative prices have an increasing effect on inflation.

Refinancing rate related next decisions will be taken in light of actual and forecast inflation, the dynamics of base inflation, and economic recovery developments in the forecast horizon. Depending on the macroeconomic stance, the Central Bank will assess the opportunities for monetary easing to keep going. 

The decision takes effect on 19 March 2021. The next decision of the Management Board of the Central Bank on the interest rate corridor parameters will be announced on 30 April 2021 accompanied by a related press conference.