On interest rate corridor parameters

21-06-2023

21 June 2023, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to leave the refinancing rate unchanged at 9%, the floor of the interest rate corridor at 7.5%, and the ceiling of the corridor at 10%.

This decision was made in consideration of macroeconomic forecasts, factors affecting inflation and the change in the balance of risks.

The annual inflation rate has been falling since the last meeting dedicated to the monetary policy. In May deflation was 0.4% compared with the previous month and annual inflation was 11.5%, down by 4.1 pp compared with the peak last September. Annual food inflation decreased to 12.7%. The annual inflation rate is falling due to relative drop in average weighted inflation in trade partners, slide in global commodity prices, return of international freight costs to pre-pandemic levels, equilibrium in the forex market amid the balance of payments surplus, appreciation of the nominal effective exchange rate (NEER) of the manat and monetary policy decisions. According to the UN FAO, food prices decreased by 2.6% monthly in May, continuing the downward trend started in April of last year. According to the World Bank’s recent Commodity Markets Outlook commodity prices decreased by 8.6%, including energy prices decreased by 11.3% and non-energy prices decreased by 3.6% on  a monthly basis in May. The balance of payments surplus manifests itself in the forex market as well. At 98% of forex auctions held at the Central Bank over recent 5 months demand fell behind supply. For the first time since 2018 banks purchased more cash USD than sold over 5 months of 2023. Over the period the volume of organized interbank forex market yoy increased by 45%. The NEER of manat appreciated by 8.4% in 2022 and by 5.1% over 5 months of 2023. Over recent months, seasonal factors have had a downward effect on inflation as well.

Although there have been no considerable changes in inflationary factors since the last meeting, there have been shifts in its structure. High volatility of the external environment of inflation and excess demand may be considered the main sources of risks. Over 5 months of 2023 nominal income of the population yoy increased by 14.7%. Disruption of the global financial system stability, the threat of recession in a number of advanced economies and geo-political tension keep the potential to translate into inflation developments through various channels. Growth rates of import price indexes remain on a double-digit level. Under baseline scenario assumptions, the forecast that annual inflation will be around 8.3% in 2023 remains unchanged. However, slowed external inflation pressures, as well as the effects of the monetary policy and macro prudential policy decisions since last year pave the way to cutting in inflation forecast over the remaining period of the year.

The Central Bank continues its anti-inflationary monetary policy and reforms to elevate options to affect inflation. The rise of the refinancing rate and the other interest rate corridor parameters, adequate application of monetary policy tools under new configuration, the rise in reserve requirements and changes to macro-prudential requirements contain inflationary pressures through the monetary condition. The average interest rate on 1-3 day transactions at the unsecured interbank money market reacted to the change in the interest rate corridor and has increased by 2.67 pp since last September and by 1.72 pp since the beginning of the year. As part of efforts to formulate an alternative monetary policy anchor, the Management Board of the Central Bank approved the ‘Regulations on calculation and publication of the benchmark rate (AZIR – Azerbaijan Interbank Rate) index in unsecured interbank money market’. The average weighted interest rate on transactions concluded in the national currency between banks in the Bloomberg platform (AZIR), information on their number and volume has been placed on the website of the Central Bank since May. At the same time, the Baku Stock Exchange approved changes to the ‘Regulations on calculation and publication of indexes on operations in the Repo market’, allowing representative interest rate indexes at the secured market (AINA – Azn INdex Average) to be published at a higher frequency. After the decision on the expansion of an investor base on Central Bank notes, eligible non-bank legal entities are also allowed to participate in auctions along with banks. At present, over 7% of Central Bank notes in circulation is owned by non-bank legal entities. Additional changes have been made to the conditions of placement of Central Bank notes to optimize competitive environment at note auctions and elevate investor confidence.

The Central Bank will take the next monetary policy decisions considering internal and external inflation risks and deviation of the actual and expected inflation from the target. The Bank will further continue in-depth analysis of inflationary factors and adequately use all tools at its disposal to return inflation to the target band through the monetary condition. In case of continuous fall in inflation pressures the Bank will consider possibilities for taking a pause on monetary policy tightening at least until September of the current year and then its loosening.

This decision takes effect on 22 June 2023. The next decision related to the monetary policy will go public on 26 July 2023 accompanied with a related press conference.