1 August 2017, Baku

On August 1st, 2017 the Management Board of the Central Bank of the Republic of Azerbaijan made a decision on keeping the refinancing rate at 15% and other parameters of the interest rate corridor (the corridor floor 10%, the corridor ceiling 18%) unchanged.

Amid deepening macroeconomic stability, the leading sector of the economy continues to restore its business activity. While the external balance improves, the foreign exchange market is balanced and the exchange rate of manat remains stable. On the backdrop of given trends, the Central Bank slightly expanded its balance and increased money supply to the economy with a view to managing fiscal and financial sector liquidity. Although inflation expectations continue to relatively wane, inflation-related risks, of supply and structure character in particular, still remain.

The following macroeconomic trends were taken into consideration while taking a decision on interest rate corridor parameters:

Economic activity. The dynamics of the real sector and economic activity indices demonstrate that restoration trends proceed. On the backdrop of increased government and external demand, the non-oil sector displayed 1.7 percent growth in the first half of 2017. The economic growth varies across sectors of the economy. The trade sector grew by 3.7 percent, the non-oil economy by 5.4 percent, and agriculture by 2.2 percent. Findings of the real sector monitoring conducted by the Central Bank in June suggest that the Manufacturing Industrial Production Index and the Sales Index in Trade improve, while the load capacity of production forces rises. At the same time, recent surveys conducted among households demonstrate higher consumer confidence over the last quarter.

External balance and exchange rate. The external sector indices continuously improve under the impact of considerably increased average crude oil prices compared to the forecasted level and the same period of the previous year, an increase in non-oil exports, and a decrease in non-oil imports in the first half of the year. In January-June, exports rose by 36.5 percent y.o.y, including a 27.9 percent y.o.y. increase in non-oil exports, while imports dropped by 15.7 percent compared to the same period of the previous year. The surplus of the external trade balance made up USD 1.9 bln, the strategic foreign exchange reserves of the country increased. Improvement of the external sector indicators and the existing macroeconomic policy framework ensure the balance in the forex market and exchange rate stability of the national currency. Stability of the external value of the national currency is sustainable within the current external and domestic macroeconomic parameters. Stability of manat paves the way for de-dollarization.

Monetary conditions. Albeit relatively softer over the second quarter, monetary conditions remained neutral overall in the period. The money base, the key operational target of monetary policy, increased by more than 6 percent in respond to money demand of the economy, including the fiscal sector over the past period of 2017. This factor ensures the stability of payment systems, while expanding the opportunities for lending to the economy. However, amid considerable increase in liquid assets of the banking sector since the beginning of the year, the real sector lending dynamics indicates that additional supportive measures are needed.

The monetary conditions formulated by the Central Bank are oriented at contracting existing inflationary risks by balancing proportionate growth of production via stimulating savings in the economy.

Inflation processes. According to the State Statistics Committee, the average annual inflation was 13.9 percent in the first half of 2017. Food prices shifted 18.1 percent, non-food prices 12.4 percent, and services 9.4 percent on average annual basis.

Despite the seasonal decline in monthly inflation level and relatively slackened inflation expectations, short and medium term risk factors on inflation have not been fully neutralized.

The base inflation (inflation calculated without considering price and tariff changes in government-regulated goods and services, as well as seasonal products) is projected to be prone to decline over the remaining period of 2017. However, overall inflation is likely to increase depending on the exchange rate of manat, inertia, aggregate domestic demand, price changes in government- regulated goods and services, trends in global commodity markets, etc.

The Management Board of the Central Bank will discuss interest rate corridor parameters again in 18 September 2017.