On interest rate corridor parameters

03-05-2023

3 May 2023, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to increase the refinancing rate by 0.25 pp to 9%, the floor of the interest rate corridor by 0.5 pp to 7.5% and the ceiling by 0.25 pp to 10%.

This decision was made in consideration of changes in factors affecting inflation developments in domestic and external environments and updated macroeconomic forecasts.

The annual inflation rate has dropped since the last meeting of the Management Board dedicated to the monetary policy. In March, annual inflation stood at 13.6%, 2 pp down compared to the peak rate last September. Actual inflation in main trade partners relatively slowed down under the combined influence of decreasing global economic activity, monetary policy tightening in most countries and falling trend in global commodity prices. According to the World Bank’s Commodity Markets Outlook April 2023, in March energy prices dropped by 6.3% and non-energy prices by 2.2% on a monthly basis. According to the UN FAO, the world food price index monthly decreased by 2.1% in March 2023. The current account  surplus of the balance of payments supports the exchange rate stability the key price stability anchor. Persistent favorable global prices for main export commodities and the rise in non-oil-and-gas exports gives ground to expect current account surplus at the end of the year as well. It manifests itself in the forex market too. Over 4 months of 2023 supply prevailed over demand at 97% of currency auctions. Persistent strengthening of the nominal effective exchange rate (NEER) of manat has a downward effect on external factors of inflation. The NEER of manat appreciated by 8.4% in 2022 and by 4.8% over 4 months of 2023. At the same time, decisions related to the monetary condition also contained demand factors of inflation.

High uncertainties related to inflationary factors in the national and global economies remain. Although actual inflation is prone to falling, inflation exceeded the upper band of the target by more than twice in March. Food inflation, the main structural element of inflation, is still high (16.8%). Annual price hike on non-food products and services is 11.6% and 10.8% respectively. The growth rate of producer and export price indices remains double-digit. In March annual growth on agricultural producer price index was 12.7%. In February of the current year annual import price hike was 20.4%. Aggregate demand is expanding amid rising income of the population and ongoing expansionary fiscal policy. Over three months of 2023 nominal income of the population increased by 15.2%. The external environment of inflation remains very fluctuating. The IMF in the WEO April 2023 revised global inflation up by 0.4% to 7%. According to reputable experts, with current risks persisting, core inflation may return to the target only in 2025. Rising risks related to global financial system stability may also weigh on inflation through various channels. Due to the said factors, projected inflation still exceeds the accepted target. Note that, under baseline scenario assumptions the forecast that annual inflation will be around 8% in 2023 remains unchanged.

The Central Bank continues anti-inflationary monetary policy in light of internal and external risks of inflation. Under the influence of decisions on interest rate corridor parameters, the average interest rate in the unsecured interbank money market has increased by 1.2 pp since the beginning of the year. Decisions taken on monetary condition tightening starting from last year, adequate application of monetary policy tools under new configuration, upward shift in reserve requirements and introduction of relevant macro-prudential requirements influence monetary indicators. Reforms to strengthen the pass-through capacity of the monetary policy to inflation continue. An investor base for notes was expanded and changes were made to terms of placement of notes to allow the formulation of yield curve on various durations by elevating competition at auctions on placement of Central Bank notes and support activity in the short-term money market. It was decided to allow resident commercial legal entities engaged in the non-oil and non-government sectors (excluding legal entities engaged in financial and insurance activities) to be entitled to own notes under certain limits along with banks. Expansion of the volume of short-term notes by increasing the number of investors will have a positive effect on activity in the securities market.

The Central Bank will take next monetary policy decisions considering the level of deviation of the dynamics of actual and expected inflation from the target and internal and external inflation risks. In response to risks in the inflationary environment the Central Bank will strive to further curb inflation through the monetary condition and closely monitor factors that push inflation.

In case of continuous fall in annual inflation indicators and forecasts, the Bank will first make a pause on monetary policy tightening and consider possibilities for its normalization, i.e. loosening.

This decision takes effect on 4 May 2023. The next decision related to the monetary policy will go public on 21 June 2023.