On interest rate corridor parameters

20-09-2023

20 September 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, and the change in the balance of risks on internal and external inflation factors.

The annual inflation rate has been falling since the last meeting dedicated to the monetary policy. There has been deflation in the country for the fourth month in a row. In August monthly deflation was 0.4%. Annual inflation was 8% in August, down by 7.6 pp compared with the peak inflation of recent years last September. Annual food inflation decreased to 7.4%.

The annual inflation was driven by both external and internal factors. The persistent drop in average weighted inflation in trade partners reduced imported inflation, attributable to the drop in global commodity prices, weakened global economic activity and the tight monetary policy pursued in most countries. According to the World Bank’s recent Commodity Markets Outlook, the total commodity price index decreased by 29.6% on annual, energy prices decreased by 37.1% and non-energy prices decreased by 7.3% in August. According to the UN FAO, the food price index decreased by 2.1% on a monthly and by 11.8% on an annual basis in August. At the same time, the maintained equilibrium in the FX market, 18% appreciation of the nominal effective exchange rate of the manat over 8 months of the year and monetary policy decisions curbed inflationary pressures through the monetary condition.

A still favorable external environment was the key in supporting the FX market equilibrium. In January-June 2023 current account surplus of the balance of payments stood at $5.2B (14.5% of GDP). Under baseline scenario, current account surplus is forecast to amount to about 15% of GDP as of end-2023. Supply prevails over demand significantly in the FX market amid the balance of payments surplus and continuing de-dollarization. Over 8 months of the current year supply prevailed over demand at 99% of FX auctions held at the Central Bank. Over the period the Central Bank made $122M worth purchase oriented interventions to the FX market.

Despite the drop in actual inflation, lingering uncertainty in the global economy and the risk of excess demand preserve the capacity to weigh on inflation. Deeper fragmentation of the global economy on the backdrop of geopolitical tensions and higher-than-expected increase of the average temperature due to climate changes may push up commodity, in particular food and energy prices again. According to the recent Outlook by the IMF, in 2023 in 96% and in 2024 in 89% of the economies that have announced their inflation targets, inflation is expected to be higher than the target. Amid prevalence of supply over demand there may be a need to increase purchase-oriented interventions by the Central Bank to the FX market to maintain the FX market equilibrium mainly due to fiscal operations, which may be considered a main internal risk to push inflation, triggering excess expansion of money supply.

In general, strengthened factors that pull inflation elevate the probability that annual inflation will approximate the target as of end-year and 2024.

The Central Bank continues the anti-inflationary monetary policy and to implement measures to increase influence on inflation. The objective is to contain excess demand by tightening of the monetary condition. Banks started to maintain required reserves under the new norms in August, due to which additional AZN350M worth excess liquidity was absorbed. At the same time, to regulate banking system liquidity the Bank continues auctions with notes of various duration. In general, the Central Bank held 93 various duration note auctions over 9 months. Policy rate decisions and liquidity changes weigh on average interest rates on money market operations. Over 8 months average weighted interest rates on deals in the national currency concluded in the secured and unsecured money market among banks (in particular, 1D AZIR and 1W AINA_IB indexes) responded to changes on the interest rate corridor. Analyses suggest that interbank interest rates on certain bank groups and interest rates on manat denominated deposits of legal entities vary in the same direction.  In general, monetary condition tightening both supports the increase in savings in manat on the banking sector and contributes to de-dollarization.   

The Central Bank will take next monetary policy decisions in consideration of the balance of risks on external and internal factors of inflation and updated macroeconomic forecasts.

The next decision related to the monetary policy will go public on 1 November 2023 accompanied with a related press conference.