30 April 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%.
Since the last meeting no considerable changes have taken place in the balance of risks to deviate inflation from the target. Inflation is mainly driven by non-monetary one-time costs and seasonal factors. Amid a favorable external environment, equilibrium in the FX market balances effects of cost factors. Aggregate demand that is under recovery is not expected to increase pressure on inflation exceeding supply. Although there have been changes in inflation expectations, updated forecasts show that inflation will remain within the target band by the yearend.
Next interest rate corridor parameters related decisions will be taken in light of the evaluation of actual and expected inflation against the target, aggregate demand recovery rate, and changes in external and internal risks.
Inflation. Since the last meeting of the Management Board dedicated to the monetary policy annual inflation rate fell and was close to the target center. According to official statistics, in March annual inflation was 4.1%.
The dynamics of inflation is mainly affected by non-monetary factors. Average annual core inflation calculated by excluding swings in regulated prices and prices for seasonal agricultural products was 2,2% in January – March 2021.
The dynamics of actual inflation of recent months weighs on inflation expectations too. According to real sector monitoring, in March inflation expectations increased in the non-oil industry, trade and construction, and decreased in services. The survey among households in March suggests that only 25% of respondents expect inflation to rise.
According to the forecasts updated in April annual inflation will be within the target band as of the yearend.
External sector. Since the last meeting the external background has changed mainly to support the main anchor of price stability.
According to the recent release of the IMF, in 2021 global economic growth will make 6%, up by 0.5 pp vs the previous update. A more optimistic forecast is attributed to expected results of the vaccination and additional anti-crisis measures by countries.
Recovery of global economic activity amid the OPEC++ deal supports demand in the oil market. The average Brent oil price exceeded $62 over the past period of 2021. According to updated forecasts of international organizations, oil prices will be close to the current level over the remaining part of the year.
In case recent trends linger, the current account is expected to be in surplus by the end of 2021.
Ongoing hike in global food prices is having an upward effect on inflation. Global food prices increased by 2.1% in March, and by 24.6% over the recent 12 months.
Monetary condition. Monetary condition is contributing to the optimum balance between supporting economic growth and safeguarding macroeconomic stability.
Since the last meeting, there has been a slight fall in nominal and real interest rates across various segments of the money market.
Mainly due to the rise in a single treasury account change of the base money has been negatively zoned since early year. On this backdrop, the size of liquidity operations was decreased to support the liquidity of the economy.
Lending continues its gradual recovery. In Q1, the lending portfolio of the banking system increased by 1.4%, business loans by 1%, mortgage loans by 4.4%, and consumer loans by 0.5%. Extension of most of the macro-prudential easing until July 1 is providing additional support for credit activity.
In the environment of FX market stability, dollarization keeps falling both on deposits and credits, attributable to rising confidence in the national currency.
Economic activity. Since the gradual recovery of aggregate demand fails to exceed total output capacity of the economy, for the time being it does not create pressure on inflation.
Anti-crisis measures kicked-off last year and relatively improved international conjuncture is translating to gradual recovery of economic activity. In Q1 2021 the non-oil and gas sector grew by 2.1%. International organizations and rating agencies revised up economic activity-related outlook for Azerbaijan.
Alternate statistics confirms the recovery of economic activity. According to real sector monitoring, in March the business confidence index was prone to rising in trade, services and the non-oil industry. Monitoring indicates that employment is prone to rising in construction.
Mainly public investments driven aggregate demand is not expected to make pressure on inflation in short run. Surveys among households indicate that the consumer confidence index is weak.
Risks balance. No permanent and considerable risks are on air to deviate inflation from the target.
Relatively favorable international conjuncture, trends of the balance of payments improvement and a counter cyclic macroeconomic framework support rebalancing in the FX market. As aggregate demand growth has not yet surpassed supply, its impact on inflation is neutral.
Increasing factors mainly include cost factors. Although ongoing price hike in the global food market, as well as other cost factors will have an upward effect on prices and inflation over the remaining period of the year, they are not capable of significantly changing the balance of risks.
Next interest rate corridor parameters related decisions will be taken in light of changes in the balance of risks and their effects on the short and medium forecast horizon.
The decision takes effect on 30 April 2021. The next decision of the Management Board of the Central Bank on the interest rate corridor parameters will be announced on 18 June 2021.