On interest rate corridor parameters

31-07-2024

31 July 2024: The Management Board of the Central Bank of the Republic of Azerbaijan has decided to keep 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 to keep the interest rate unchanged was made by taking into account  formation of actual inflation rates in accordance with the forecast, the dynamics of inflation factors and the assessment of the risk balance.

Although the annual inflation has risen since the last meeting, it has remained below the lower bound of the target range (4±2%). In June 2024, the twelve-month inflation stood at 1.1%, while annual core inflation stood at 0.8%. Annual food inflation was 0.2%, non-food inflation 1%, and services inflation was 2.4%.

The overall external inflationary environment is neutral. However, the steady decline in prices observed in the previous months has stopped and some products have experienced price increases. The appreciation of the nominal effective exchange rate of the manat (3% over the first half of 2024) provided additional contribution to the decline of imported inflation.

The foreign trade surplus, which is the key component of the balance of payments, was $4 billion in the first half of 2024. During this period, the country's strategic FX reserves increased by 1.8% to about $69.7B. The Central Bank's FX reserves increased by 1.1% to $11.7B.   

Monetary policy tools are employed in response to changes in financial markets and the liquidity position of the banking system. In July, the average interest rate on one-day unsecured transactions (1D AZIR) was 6.94% (6.75% in June) and formed within the interest rate corridor. The Central Bank reduced the volume of sterilization operations taking into account the effect of the change in the balances of government accounts on the liquidity of the banking system.

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. Key domestic risks that could drive inflation higher include the activation of local cost factors and an excessive expansion of aggregate demand. The monetary condition in advanced economies is still tight. According to preliminary estimates, the increase in budget expenditures resulting from the government budget adjustment in 2024 will not lead to significant inflationary pressure. However, particular attention is paid to the impact of budget spending and credit to economy on inflation in the medium term.

Overall, current monetary conditions are aimed at keeping inflation within the target range and at stabilizing inflation expectations. According to the updated forecast, if current conditions remain unchanged, inflation is expected to be 5.4% in 2024 and 5.5% in 2025 in the baseline scenario. The upward revision of the inflation forecast is primarily attributable to the anticipated slower appreciation of the nominal effective exchange rate of the manat, along with adjustments in the prices and tariffs of goods and services regulated by the government. The direct and indirect impact of the rise in regulated prices on the inflation forecast is projected to be 1.5 p.p., with 1 p.p. likely to realized in 2024. Further decisions on the interest rate will depend on the actual inflation and its forecast, the dynamics of external and internal risk factors.

This decision takes effect on 1 August 2024. The information on the next decision on interest rate corridor parameters will be made public on 18 September 2024.