On interest rate corridor parameters

29-03-2023

29 March 2023, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to increase the refinancing rate to 8.75%, the floor of the interest rate corridor to 7% and the ceiling to 9.75%.

This decision was made in consideration of the dynamics of the push and pull factors on price levels in domestic and external environment.  

Inflation in trade partners keeps subduing gradually. This process takes place on the backdrop of actual and expected drop in global economic activity, monetary policy tightening in most countries, stabilization of, even drop in certain categories of commodity prices. According to the UN FAO, the food price index decreased by 18.7 pp from its peak in March 2022 with 0.6% drop in February 2023 and yoy decreased by 8.1%. Hence, world food prices have been falling for 11 months in a row since last April. All this weighs on the actual and expected dynamics of domestic inflation with a certain time lag. At the same time, current account surplus of the balance of payments supports the exchange rate stability, the key price stability anchor. Persistent appreciation of the nominal effective exchange rate (NEER) of the manat neutralizes foreign cost factors of inflation. 8.4% appreciation of the NEER in 2022 was followed by further 2.2% strengthening of the NEER during first two months of 2023. Adequate regulation of the monetary condition by the Central Bank also contains internal demand factors of inflation. Under the combined effect of the factors above, in February 2023 annual inflation stood at 14.1%, down by 1.5 pp compared to the peak level of the last one year (15.6% in September 2022).

However, even if we observe the dynamics of drop of inflation in the domestic market from the peak, uncertainties remain regarding the expected changes in demand and supply factors and the behavior of economic agents. Aggregate demand is expanding amid the stimulatory fiscal policy and rising foreign currency revenues of the country, economic activity in the non-oil sector is still high. The fourth social reform package realized since the beginning of the current year and ongoing lending activity support consumption, the key component of aggregate demand. Although annual growth of the lending portfolio on banks and non-bank credit institutions slightly slowed down, it is still high and stood at 15.7% in February. The decision on changes to the prices for certain services (products) whose prices (tariffs) are regulated by the government may also weigh on inflation expectations. The said factors affect the fact that projected inflation still exceeds the accepted target band. With the assumptions under the baseline scenario, the forecast that annual inflation will be around 8% remains unchanged.

The Central Bank continues anti-inflationary monetary policy in response to the risks in internal and external environments of inflation. In accordance with the decision on reserve requirements to effectively regulate money supply and restrict concentration of liquidity in the banking system, banks started to maintain  required reserves  under new norms in February 2023. In March the amount of required reserves in the manat to be maintained by banks increased by AZN371M (57%) compared to January. To elevate effectiveness of liquidity absorbing operations, the Management Board of the Central Bank decided to increase the quota on one-day standing deposit facilities from 27 February 2023. At the same time, the Central Bank started to conduct seven-day Repo operations. The said decisions allow regulating demand factors of inflation through the monetary condition.

Next decisions on the monetary policy will depend on the dynamics of inflation, the level of deviation of forecast from the target and persistency of risks. Operations conducted by the Central Bank and results of previous decisions will be monitored to be considered in policy decision-making. The Bank will use all tools and mechanisms at its disposal adequately to reduce inflationary pressures by containing excess demand and consumer activity. In the event forecasts related to the drop in inflation come true, the Bank will consider options for the normalization followed by easing of the monetary policy taking into account the time lag of transmission.

This decision takes effect on 30 March 2023. The next decision related to the monetary policy will go public on 3 May 2023 to be followed by a relevant press conference.