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1 May 2024, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to decrease the refinancing rate to 7.25% from 7.5%, the ceiling of the interest rate corridor to 8.25% from 8.5% and leave the floor of the interest rate corridor unchanged at 6.25%.
This decision was taken in consideration of the comparison of the actual and forecasted inflation with the target (4±2%), the stabilization of inflation expectations and changes in the balance of risks. Considering that forecasted inflation is shifting downwards, the reduction of the ceiling of the interest rate corridor and the refinancing rate is oriented towards monetary easing. The floor of the interest rate corridor being left unchanged contributes to lowering volatility of interbank interest rate. When defining these parameters of the interest rate corridor, their potential impact on interest rates in the interbank money market was also considered.
The inflation rate has been falling since the last meeting. In March 2024 annual inflation stood at 0.4%, while annual core inflation stood at 1%. Annual food deflation made 1.1%, non-food inflation 1.1% and services inflation was 2.2%.
A low inflation environment supports the drop in inflation expectations. Findings of surveys suggest that the share of households that expected inflation to rise in the first quarter decreased by 1 pp compared with the previous quarter.
The external background of inflation remains favorable. Global inflation slowed down in consequence of slides in global commodity prices. According to the World Bank, whereas in March 2024 the commodity price index increased compared with the previous month, it decreased 0.3% annually, non-energy prices dropped by 2.4%. The UN FAO reported 7.7% drop in the food price index in March on an annual basis. The appreciation of the nominal effective exchange rate of the manat (19.3% in 2023 and 2.7% in Q1 2024) provided additional contribution to imported inflation.
The balance of payments surplus supports FX market equilibrium. Trade surplus, the core balance of payments component, amounted to $2.3B in Q1 2024. According to updated forecasts, if current trends persist, current account will remain in surplus by the end of 2024.
Monetary policy tools are employed in response to the developments across various segments of financial markets and the liquidity position of the banking system. Active usage of monetary policy tools ensures that average interest rates in the money market move within the interest rate corridor of the Central Bank. Over the past period of April, the average interest rate on one-day unsecured transactions (1D AZIR) was 6.66% (6.52% in March) and formed within the interest rate corridor. Interest rates in the interbank market have been increasing within the interest rate corridor and the difference between the 1D AZIR index and the refinancing rate has been decreasing recently. Over the period autonomous (non-monetary policy) factors, in particular the rise in balances of government accounts due to the state budget surplus has a downward effect on banking system liquidity. Yield on CBA notes and government securities has increased since early year.
There has been no considerable change in the risk balance of inflation since the last meeting. The main inflationary risks of external origin include geopolitical tensions, impediments in the critical international trade routes, climate changes, volatile global commodity prices and inflation in trade partners. However, still tight monetary conditions in the world, expectations of more moderate interest rate cuts by central banks in advanced economies in the medium run are the factors to drive down global inflation. The main internal risk to push inflation is associated with the activation of local cost factors, as well as government expenses and overexpansion of aggregate demand.
In general, upside and downside risks of inflation balance each other. If current conditions remain unchanged, in 2024 and 2025 annual inflation is expected to be within the target band (4±2%) (the April forecast: 3.5% in 2024 and 4.2% in 2025). In April, the inflation forecast for 2024 was revised down.
Next monetary policy decisions will depend on the comparison of actual and forecasted inflation, and the dynamics of external and internal risk factors. The equilibrium level of inflationary factors, the current inflation dynamics and the effect of non-monetary policy factors on the monetary condition and aggregate demand elevate the probability of leaving interest rate corridor parameters unchanged in the near term. Macroeconomic indicators will continue to be thoroughly analyzed in the upcoming period and all available facilities will be used to safeguard price stability.
This decision takes effect on 2 May 2024. The information on the next decision on interest rate corridor parameters will be made public on 21 June 2024.
01.05.2024