18 June 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%.
The role of amplifying factors in the balance of risks of inflation elevated. Although actual inflation rose amid non-monetary external and domestic cost factors, as well as activation of deferred demand, it is still within the target band. There are uncertainties concerning the sustainability of demand factors of inflation. The inflation forecast was not changed, despite the fact that impact of non-monetary factors on inflation will increase for the rest of the year. Improved balance of payments supports the main anchor of macroeconomic stability – the exchange rate stability and balances factors of inflation. The balance of risks and the expectation that seasonal factors will intensify their impact on inflation in upcoming months are the main factors behind the decision.
Next interest rate corridor parameters related decisions would be taken in light of updated macroeconomic forecasts, comparison of expected inflation with the target and changes in the balance of risks.
Inflation. Annual inflation has remained within the target band (4±2%) since the last meeting of the Management Board dedicated to the monetary policy. According to official statistics, in May the consumer price index remained stable, 12-month inflation made 4.9%.
Seasonal factors had a downward and ongoing global food price hike an upward effect on food inflation, the main traditional source of overall inflation. Seasonal factors are mainly accompanied by lower prices for local fruits and vegetables. In May, food prices fell by an average of 0.6%, and annual food inflation was 5.2%.
Import of inflation, recovery in aggregate demand and domestic cost factors weigh in on prices for non-food products and services. On an annual basis, prices in May rose by 4.4% for non-food products and 4.8% for services. Thus, the role of price changes in non-food products and services in the structure of annual inflation has increased.
Average annual core inflation calculated by excluding swings in regulated prices and prices for seasonal agricultural products was 2.6% in January-May, 2021.
Actual inflation inertia also translates to inflation expectations. According to real sector monitoring, the price expectations index has been in a positive zone in the non-oil industry, trade and construction over recent 3 months. In May, inflation expectations slightly decreased in the non-oil industry, trade and services vs the previous month and increased in construction.
According to forecasts updated in June, annual inflation will remain within the target band as of end-2021. Seasonal factors are expected to have a downward effect on inflation in June, July and August.
External sector. The recovery of the global economy and impact of rising commodity prices on inflation are multifaceted.
Accelerated vaccination against COVID-19 and easing of quarantine restrictions in particular countries is accompanied by higher activation in the global economy. In light of recent trends, the World Bank and the OECD have revised the global economic outlook up.
High global economic activity pushes oil demand up. Oil prices keep rising amid conservative responses to high demand within the frames of the OPEC++ deal. The average Brent oil price was $64 over the past period of 2021 and exceeded $70 since the beginning of June, the highest price of recent 2 years.
Recent trends in the global environment, as well as higher non-oil exports positively weigh on the balance of payments, the key factor of FX market stability. The current account surplus amounted to 5.6% of GDP; capital account was also in surplus in Q1 2021. In June 2021, annual forecast on current account surplus was revised up.
On the backdrop of balance of payments surplus strategic foreign exchange reserves increased by 2.8% ($1.5B) to $52.3B.
Direct and indirect upward translation of global food prices to domestic inflation continues. Global food prices hiked by 4.8% in May and by 39.7% over recent 12 months.
Monetary condition. There has been no considerable change in the monetary condition since the last meeting.
Change of base money has stepped to a positive zone since the early year. Over the rest of the year, growth of money supply will mainly depend on changes in balance of a single treasury account. Acceleration of cashless transactions affects the structure of money supply too, aided by a drop in demand for cash.
Monetary and macro-prudential stimuli, as well as government’s preferential programs support lending. The lending portfolio of the banking system has increased by 3.8% over 5 months, business loans increased by 2.4%. Mortgage loans that push economic activity in construction and a number of related real sector areas increased by 7.2%. Though increased by 5.1% amid activation of consumer demand, consumer loans failed to recover the pre-pandemic level.
Interest rates vary across various segments of financial markets. Yield on government securities has decreased since the last meeting, and deposit and credit rates have undergone no considerable changes. Gradual rise in demand for loans has an upward effect on deposit and credit rates for some bank groups.
Dollarization keeps declining. Manat denominated deposits in the structure of savings of individuals have prevailed for the first time since 2015. Manat denominated term deposits of individuals have increased by 16.1% over 5 months.
Economic activity. Aggregate demand continues to rise when production capacity is not fully loaded.
Large-scale vaccination and relative improvement of the epidemiologic situation have a positive effect on economic activity. In January-May 2021, the non-oil and gas sector grew by 4.5% - trade increased by 10.1% (industry and agriculture), and non-trade by 3.2%.
Economic growth is driven by public investments, start of building efforts in liberated territories, external demand, as well as relatively revived consumer demand. However, estimations suggest that, aggregate demand has not reached the pre-pandemic level so far.
Surveys confirm economic activity recovery in a number of sectors. According to real sector monitoring, in May the business confidence index (BCI) was prone to rising in services and construction, remained unchanged in the positive zone in trade. The BCI in services rose mainly due to actual demand. Production expectations on non-oil industrial entities attracted to the survey have increased over the recent months.
Since relatively active investment and consumer demand is accompanied by adequate growth of supply, they do not push demand inflation for the time being.
Risks balance. The role of rising factors in the balance of risks on inflation has increased. Rising factors mainly include non-monetary cost factors. Economic growth and, accordingly, recovery of aggregate demand is not expected to create significant inflationary pressures in short and medium term. Monetary factors are estimated not to have a significant rising effect on inflation over the rest of the year. Improved balance of payments both reinforces FX market stability and neutralizes the upward effect of external and internal cost factors, especially the price hike in the global food market on inflation.
Next decisions on interest rate corridor parameters will be taken in light of the state of hitting the inflation target, inflation expectations, and changes in external and internal risks.
The decision takes effect on 18 June 2021. The next decision of the Management Board of the Central Bank on the interest rate corridor parameters will be announced on 30 July 2021, accompanied by a related press conference.