On interest rate corridor parameters

26-07-2023

26 July 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 analyses, updated forecasts, internal and external factors affecting inflation and the change in the balance of risks.

The annual inflation rate has been falling since the last monetary policy meeting. In June, deflation was 0.9% compared to the previous month, annual inflation was 10.6%, down by 5 pp compared to the peak of recent years recorded last September. Annual food inflation decreased to 11.5%.

Annual inflation has declined due to both external and internal factors. The decline in inflation in trade partners, slide in world commodity prices, return of international freight costs to pre-pandemic levels have had a downward impact on inflation. Average weighted inflation in trade partners in June this year is estimated to have fallen by more than double compared to the peak observed in October last year. This is mainly due to the slowdown in global economic activity, the decline in global energy prices and the tightening of monetary policy in most countries. According to the World Bank’s recent Commodity Markets Outlook commodity prices decreased by 37.1%, including energy prices decreased by 45.1% and non-energy prices decreased by 15.1% on an annual basis in June. According to the UN FAO, food prices decreased by 20.9% annually in June. At the same time, the equilibrium in the forex market, appreciation of the nominal effective exchange rate (NEER) of the manat (10.3% in the first half of the year), and the adopted monetary policy decisions reduced inflationary pressures through monetary conditions. The favorable external environment and the increased non-oil export potential played a special role in supporting the equilibrium in the forex market. In the first quarter of 2023, the balance of payments surplus amounted to USD3.4B or 18.9% of GDP. Positive processes in the foreign sector continue in the next quarter.

The high volatility of the external environment and the risk of excess demand can be seen as factors that could increase inflation, despite the observed decline in the inflation rate. In the context of the ongoing geopolitical conflict, the disruption of the international logistics chain, the expectations that inflation in a number of countries will remain above target for a long time have the potential to affect inflationary processes through various channels.

In general, the strengthening of the factors dampening inflation increases the probability that the annual inflation rate will be close to the target by the end of the year and by 2024.

The Central Bank continues its anti-inflationary monetary policy and reforms to elevate options to affect inflation. The dynamics of the interest rate corridor parameters, the appropriate use of monetary policy tools and changes in macroprudential requirements limit the excess growth of aggregate demand. Average interest rates on money market operations continue to react to changes in the interest rate corridor. The AZIR (Azerbaijan Interbank Rate) index, the average weighted interest rate on unsecured interbank money market transactions concluded in the national currency, which has been published daily since May, is on an upward trend. Thus, since the beginning of the current year, the 1-day AZIR index has increased by 1.87 pp, and the 1-week AZIR index by 1.04 pp. In order to regulate the money supply more effectively, to further limit the concentration of liquidity in the banking system, and to support de-dollarization trends, the rule of differentiation of required reserve ratios has been revised. It has been decided that from July 2023, all banks will have to calculate required reserves in accordance with the new rules, and from the next maintenance period (15 August 2023) they will have to maintain required reserves in accordance with the new rules. Differentiated application of required reserve ratios depending on the size of deposits of legal entities will allow reducing liquidity concentration and sterilizing excess liquidity.

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 next decision related to the monetary policy will go public on 20 September 2023.