29 April 2022, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan left the refinancing rate unchanged at 7.75%, the floor of the interest rate corridor at 6.25%, while the ceiling at 9.25%.

No considerable change has been in an annual inflation rate since the last meeting. Whereas high price hikes in trade partners accelerate the import of inflation, on the backdrop of the balance of payments (BoP) surplus, equilibrium in the FX market and appreciation of the nominal effective exchange rate (NEER) significantly contains the import of inflation. Monetary policy decisions of the Central Bank and anti-inflationary measures by the Government also curb inflation. On the other hand, the downward adjustment of money supply growth forecast for the end-2022 has a reducing effect on inflation, tightening the monetary conditions due to quantitative factors and reduces the need for additional monetary policy tightening in terms of value.

Next interest rate corridor parameter related decisions will be taken in light of global economic trends, response of the country economy and financial markets to these trends and comparison of forecast and actual inflation.

Inflation. There has been no considerable change in the annual inflation rate since the last meeting dedicated to the monetary policy. According to official statistics, in March 2022, overall level of prices y.o.y. increased by 12.1%, while monthly inflation was 1.1%. In March food prices y.o.y. rose by 16.8%, non-food prices by 6.6% and service prices by 10%.

Continuing increase in world commodity prices keep translating to inflation globally. According to the World Bank, in March global commodity prices y.o.y. increased by more than 2 times on energy and by 31.7% on non-energy prices. According to the Food and Agriculture Organization (FAO), global food prices increased by 12.6% in March and by 33.6% over recent one year. Despite the fact that all this is accompanied with rising inflation in partners, appreciation of NEER considerably contains the inflationary imports.

Inflation expectations of households have dropped since the last meeting. The share of households expecting inflation to rise further was 24.5% in Q1 2022, down from the one in the previous quarter (28.6%).

In the medium run, inflation is expected to gradually move towards the target range because of the reduction of external factors of inflation and anti-inflationary measures implemented jointly with the Government.

External sector. Although uncertainties related to the global economic environment triggered by the geopolitical situation are high, the BoP is forecast to be in surplus.

Since the last meeting, prices for main Azerbaijani export products have remained high. The average Brent oil price has been over $100 over the past period of 2022. The price for gas, another export product, is still high. International organizations revise up the forecast price for energy commodities, including the oil for the current year.

Hiking world prices on export commodities and continuing rise in the non-oil export increase current account surplus of the BoP, paving the way to the rise in strategic FX reserves and supporting of the balance in the FX market.

Economic activity. Economic activity continues without pushing inflation up, expectations on economic growth outlook are optimistic. In Q1 2022 GDP increased by 6.8% in real terms, and by 10.3% on the non-oil sector. The non-oil and gas industry grew by 16.4%, agriculture by 3.4% and construction by 5.6%.

Economic growth is mainly driven by domestic demand. In Q1 2022 retail trade y.o.y. increased by 3.1%, and paid services to the population by 5.2%. Over the same period, non-oil investments increased by 10.1%.

According to real sector monitoring findings by the Central Bank, in March the business confidence index increased in the non-oil industry, trade and services compared to the previous month. In March production expectations increased in the non-oil industry, sale expectations increased in trade and demand expectations increased in services compared to the previous month.

Despite global environment related uncertainties triggered by the geopolitical and geo-economic situation, international organizations and main think tanks also forecast that economic growth will continue in Azerbaijan this year.

Monetary condition. In response to monetary policy decisions, as well as developments in the external environment and the fiscal sector, the monetary condition has a downward effect on inflation.

The equilibrium in the FX market and stronger NEER are still the critical factor to contain the inflation import. 

Another indicator that contribute to the monetary condition – the money base in manat has decreased by 7.2% over the past period of 2022 amid state budget surplus. Growth forecast of the money base as of end-2022 has been revised down, which will drive down inflation.

In Q1 2022 the lending portfolio increased by 5.2% on the banking system. Over the period savings and deposits increased by 3.9%, less financial sector deposits.

There has been no significant change in credit and deposit interest rates, as well as in interest rates in the national currency denominated risk-free tools’ market since the last meeting.

Balance of risks. There has been no dramatic change in the balance of risks of inflation.

Longer-term geopolitical and geo-economic tensions are still major risks. This could lead to high inflationary pressures in the world. High price hikes in partners and supply chain disruptions may affect Azerbaijan through inflation. The monetary condition, including the strengthening of the NEER is the major factor to curb inflation importation. The FX market equilibrium is supported by the BoP surplus and the macroeconomic framework. As of end-2022, the probability of high current account surplus of the BoP has increased.

Next interest rate corridor parameter related decisions will be taken in light of revised macroeconomic forecasts and the change in the balance of risks.

This decision takes effect on 29 April 2022. Next monetary policy decision will be announced on 17 June 2022.