On interest rate corridor parameters

20-12-2023

20 December 2023, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to decrease the refinancing rate to 8% from 8.5%, the floor of the interest rate corridor to 6.5% from 7% and the ceiling of the interest rate corridor to 9.0% from 9.5%.

This decision was made considering the fact that actual and forecasted inflation is within the target band (4±2%), inflation expectations stabilized and excess supply in the FX market.

The annual inflation rate has been decreasing faster than expected since the last meeting of the Management Board dedicated to the monetary policy. In November 2023 annual inflation was 2.6%. Annual inflation has been within the target band for already three months in a row.  Monthly dynamics of prices also keep decreasing year over year. There was deflation in November, the consumer price index fell by 0.2%, unusual for the period.

Annual inflation decreased in response to external and internal factors. Slowdown in external inflation caused by lower global economic activity and the tight monetary policy across most countries. The continued slide in global commodity, in particular energy and food prices reduced imported inflation. According to the World Bank, the commodity price index decreased by 18.3% on annual basis in November, including energy prices by 23.9% and non-energy prices by 4.6%. According to the UN FAO, the food price index decreased by 10.7% on annual basis in November. Amid the FX market equilibrium, 19.5% appreciation of the nominal effective exchange rate (NEER) of the manat over 11 months of 2023 was critical in the drop in imported inflation. Over the period out of internal factors the producer prices index on food processing industry products decreased (y.o.y. decrease by 2.5% in November), and the growth rate of agricultural producer prices (4.1% annual increase in November) dropped. These factors drive inflation down within a certain time horizon. Anti-inflationary measures implemented by the government and the Central Bank also weighed on the fall in inflation.

Due to large surplus in the current account of the balance of payments ($6.7B or 12.5% of GDP over 9 months) supply has prevailed over demand at 95% of currency auctions held at the Central Bank since early year. On this backdrop the Central Bank made $1.4B worth purchase-oriented interventions to the FX market. Consequently, foreign exchange reserves of the Central Bank increased by 20.3% and surpassed $10.8B.

Monetary policy tools have been applied to neutralize the impact of external (autonomous) factors of liquidity on the monetary condition and to effectively manage banking system liquidity since the last meeting. The actions implemented also contributed to the transmission of the monetary policy. The weighted average interest rates of national currency deals concluded both in the unsecured and secured money market among banks reacted to interest rate corridor changes. Over the past period of December, the average interest rate on one-day unsecured transactions (1D AZIR) was 7.7% and the one-week interbank Repo rate (1W AINA_IB) was 7.84%, both within the interest rate corridor.

There are upside and downside factors among external factors of inflation in the medium run. Geopolitical tension may again trigger price hikes in the world market. International organizations kept their energy price forecasts high for 2024. This may have an upward effect on inflation in energy importing partner countries. At the same time, international organizations highlight upward effects of climate changes and low productivity on food prices in the medium run as a risk. Lower than expected global economic activity and the lingering tight monetary condition in most economies might have a downward effect on global inflationary processes. Persistent depreciation of national currencies in trade partners in upcoming years may both appreciate the NEER of the manat and reduce imported inflation.  

The main internal risk likely to influence inflation is excessive expansion of money supply. In the remaining period of the current year the purchase of unrealized foreign exchange supply of the fiscal sector by the Central Bank might have an upward effect on money base in the manat. If current trends linger, Central Bank’s intervention to the FX market is likely to be purchase-oriented in 2024 as well.

Further decisions on the parameters of the interest rate corridor will be made depending on external and internal factors in the inflationary environment. Developments in financial markets, including the FX market will be also considered in decision-making.  

This decision takes effect on 21 December 2023. The Bank will publish a schedule of disclosure of decisions on interest rate corridor parameters for 2024 at the end of the year.