On interest rate corridor parameters

16-12-2022

16 December 2022, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to shift the refinancing rate by 0.25 pp to 8.25%, the floor of the interest rate corridor by 1.25 pp to 6.25% and leave the ceiling of the interest rate corridor unchanged at 9.25%. The decision to contract the width of the interest rate corridor was taken in accordance with prior explanations issued by the Management Board of the Central Bank in August 2022 with respect to the introduction of the new monetary policy operational framework.

 

The decision also rests upon actual indicators and updated macroeconomic forecasts.  

 

Drop in global food prices, relative slowdown in inflation in trade partners weigh on the inflation rate in the country with a time lag. Whereas annual inflation has stabilized over last two months, it is still double-digit. The monetary base is forecast to grow by double-digit by the end of the current year. On this background, tightening the monetary policy to contain excess demand was deemed expedient. A decision was taken to contract the width of the interest rate corridor to manage liquidity in the financial sector and enhance pass-through of interest rate corridor parameters to interest rates in the short-term money market. Changes to the interest rate corridor parameters also serve to maintain attractiveness of national currency-denominated savings.     

 

The pace, level and duration of monetary policy tightening will depend on annual inflation indicators and updated forecasts in the upcoming period. In case of decrease in annual inflation indicators and forecasts, the Bank will initially consider a pause on monetary policy tightening to be followed by possibility of its decrease.

 

External sector. The balance of payments surplus keep supporting supply channels in the FX market.

 

The growth rate of exports remains high both on oil and gas and non-oil sectors. Foreign trade surplus, the main current account component, yoy increased by 3.1 times to $23.1B over 10 months. Over the same period, the non-oil export increased by 16.2% to $2.4B.

 

The forecast that current account will be in surplus in 2023 remains unchanged. The current account surplus to GDP ratio is expected to remain on a double-digit level in the upcoming year with the current oil prices remaining unchanged.  

 

The balance of payments surplus is accompanied with the rise in strategic foreign exchange reserves and higher supply in the FX market, allowing saving funds of the SOFAZ further.  

 

Real sector. Official and alternative statistics shows that economic activity remains high.

 

Over 11 months of 2022, real GDP increased by 4.8% and by 9.2% on the oil and gas sector.

 

According to findings of real sector monitoring by the Central Bank actual production and capacity utilization in non-oil enterprises elevated in November compared with the previous month. 

 

Economic growth is driven both by consumption and investment components of domestic demand. Over 11 months of 2022, retail trade yoy increased by 3%, non-oil investments by 24.5%. 16.4% rise in state budget expenditures was one of the key factors stimulating domestic demand.

 

Inflation. Annual inflation has subdued in harmony with the forecast trajectory since the last meeting.

 

In November, monthly inflation was 1%, annual inflation was 15.1%. Annual core inflation stood at 14.7%.

 

Cost factors of foreign origin still prevail among the factors that contribute to the dynamics of inflation. 14% drop in global food prices over recent 6 months and relative slowdown in average weighted inflation in partners has weighed on inflation receding over recent months, albeit with 6-9-month time lag.

 

Inflation expectations vary across sectors. According to findings of monitoring among real sector entities, inflation expectations increased in trade and services in November vs October, remained nearly unchanged in the non-oil and gas industry and decreased in construction.

 

Analyses suggest that inflation peaked (15.6%) in the previous month and is expected to start going down. Uncertainties related to the inflationary environment remain high, despite single-digit inflation forecast for 2023.

 

Monetary condition keeps having a downward effect on inflation. 

 

The appreciated nominal effective exchange rate of the manat is still one of the crucial factors to contain inflationary pressures. The NEER appreciated by 7.9% over 11 months.

 

An increased amount of size of sterilization operations hold back inflationary pressures by containing growth of money supply. The monetary base in the manat increased by 7.3% over 11 months. Monetary base will be mainly driven by fiscal operations in December.     

 

Issue of various duration (1, 3, 6 and 9 months) notes of the Central Bank in accordance with the new operational framework allow forming an adequate yield curve. In October-November, notes in circulation increased by AZN660M (or 2.3 times).  The number of banks participating in the note market is increasing. Over the period, AZN194M worth transactions were conducted in the secondary note market.  

 

The interbank money market is becoming more active. Whereas banks concluded 69 transactions in September and 146 transactions in October in the Bloomberg trade platform, the number increased to 168 in November. 93.6% of transactions concluded in November were short-term (1-3 day). In November transactions concluded in the interbank repo market numbered 76, up by 3.6 times compared with the previous month. In general, in September-November total interbank transactions amounted to AZN3974M on the Bloomberg trade platform, and AZN305M on Repo.  The decisions taken at the previous meeting related to the interest rate corridor were accompanied with the rise in average interest rates in the interbank market. The average interest rate on one-day operations in the unsecured market (Bloomberg) was 0.6 pp higher in November than in October, attributable to better transmission of monetary policy decisions through the interest rate channel.

 

In November 2022, lending increased by 1% compared with the previous month, by 18.1% compared with the early year, and yoy by 21.1% on banks and NBCIs. Over 11 months business loans increased by 12.7%, consumer loans by 27.7%, and mortgage loans by 21.9%.

 

The balance of risks. Recent analyses suggest a gradual balance between the factors that take inflation up and down.

 

Drop in global food prices and its impact on relative slowing down of inflationary pressures in partner countries may drive down inflation. Lower activity in the global economy and monetary policy tightening in major countries also contribute to this process. However, realization of the recession probability may lead to significant changes in the external balance of most emerging market economies.  

 

Domestic inflation risks firstly included excess demand. To contain transformation of rising expenses to inflation, effective coordination between fiscal and monetary policies will be maintained going forward and necessary decisions will be taken to create a sustainable balance between aggregate supply and demand.

 

The Central Bank will continue to push a monetary condition capable of containing the excess demand until it enters the target band. Next decisions related to the monetary policy and the interest rate corridor will respond to inflationary factors and the scope of expected changes. The Bank will continue considering to contract the width of the interest rate corridor depending on possibilities of the new monetary policy operational framework to influence to the interest rates in the financial sector.

 

A schedule of publication of monetary policy decisions for 2023 will be announced by the Central Bank at the end of the year.

 

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