On interest rate corridor parameters

21-06-2024

21 June 2024: The Management Board of the Central Bank of the Republic of Azerbaijan decided to leave the refinancing rate unchanged at 7.25%, the floor of the interest rate corridor at 6.25%, and the ceiling at 8.25%.

The decision was made considering the comparison of the actual and forecasted inflation with the target band (4±2%), the dynamics of inflationary factors and the assessment of the balance of risks. The factors that increase and decrease inflation neutralizing each other contributed to the decision related to the interest rate corridor.

The annual inflation rate has been below the lower limit of the target band since the last meeting. In May 2024 the twelve-month inflation stood at 0.3%, consistent with the Central Bank’s April forecasts. In May twelve-month core inflation was 0.4%. Annual food deflation was 1.4%, non-food inflation 1%, and services inflation was 2.2%.

Survey results among households suggest that the expected inflation   for upcoming 12 months is close to the lower bound of the target band.  

The overall external inflationary environment is neutral. According to the World Bank, in May 2024 whereas the commodity price index increased by 5.6%, including non-energy prices increased by 5.1% annually, the UN FAO reported a 3.4% drop in the food price index. The appreciation of the nominal effective exchange rate of the manat (19.3% in 2023 and 3.2% over the five months of 2024) provided additional contribution to the decline of imported inflation.   

The balance of payments surplus is critical in the FX market equilibrium. In Q1 2024 the current account surplus of the balance of payments to GDP ratio made 10.1%. Over five months strategic FX reserves increased by 1.8% ($1.3B) to $69.7B.   

 Monetary policy tools are employed in response to developments in financial markets and the liquidity position of the banking system. Active usage of monetary policy tools ensures that average interest rates in the money market move within the interest rate corridor of the Central Bank. Over the past period of June, the average interest rate on one-day unsecured transactions (1D AZIR) was 6.75% (6.88% in May) and formed within the interest rate corridor. Autonomous (non-monetary policy) factors, in particular the rise in balances of government accounts due to the state budget surplus has a downward effect on banking system liquidity.

There has been no significant change in the risk balance of inflation since the last meeting. The volatility of inflation in partner countries and commodity prices in the global market remains the key external inflation risk. Still-tight monetary condition in advanced economies contribute to the drop in global inflation. The main internal risks that may  push up inflation are attributable to local cost factors, as well as overexpansion of aggregate demand. Accordingly, the focus should be on the expansion of budget expenditures and the effect of lending on inflation in the medium term. 

In general, upside and downside risks of inflation balance each other. If current conditions remain unchanged, in 2024 and 2025 annual inflation is expected to be within the target band (4±2%). The Central Bank will announce its updated macroeconomic forecasts at the end of July 2024.   

Next monetary policy decisions will depend on actual and forecasted inflation, and the dynamics of external and internal risk factors. The balance of inflationary factors, current inflation dynamics, and the impact of non-monetary policy factors on the monetary condition and aggregate demand keep elevated the likelihood of leaving the interest rate corridor parameters unchanged at the next meeting too.

This decision takes effect on 24 June 2024. The information on the next decision on interest rate corridor parameters will be made public on 31 July 2024 accompanied by a press-conference.