On interest rate corridor parameters

18-09-2024

18 September 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 taken in view of the fact that the actual and projected inflation is within the target range (4±2%) and the dynamics of internal and external factors of inflation.

Although the annual inflation has risen since the last meeting, it has remained within the target range (4±2%). In August 2024, the annual inflation was 3.5%, annual food inflation was 3%, non-food inflation was 1.8% and services inflation was 5.6%. Annual core inflation was 2.4%.

The overall external inflationary environment is stable. The appreciation of the nominal effective exchange rate of the manat (2.8% in the 8 months of 2024) provided additional contribution to the decline of imported inflation.

In the first half of 2024, the current account surplus of the balance of payments stood at $2.6B or 7.5% of GDP. The foreign trade balance, which is the key component of the balance of payments, demonstrated $5.5 billion surplus in the 8 months of 2024. During this period, the country's strategic FX reserves increased by 6.1% to about $72.6B.

In 8 months of the current year, the increased demand for foreign currency associated with the increase in direct foreign currency expenditures of the government (including external debt service), as well as the reduction of trade credit liabilities by the enterprises operating in the country was fully satisfied at the FX auctions organized by the Central Bank. For the rest of the year, it is not excluded that the Central Bank will intervene in the FX market to sell currencies in order to support the realization of increased government expenditures directly in foreign currency (COP29 and other government expenditures). These operations will be carried out with foreign currency obtained from the Central Bank's $4.2B buying intervention in the foreign exchange market in 2022-2023. The expected FX selling intervention will also sterilize part of the money supply, which has increased due to FX buying interventions in previous years.

Monetary policy tools are employed in response to the processes taking place in financial markets and the changes in the liquidity position of the banking system. The Central Bank has sharply reduced the volume of sterilization operations since the beginning of the year, taking into account the impact of the change in the balances of government accounts on the liquidity of the banking system. The volume of notes issued by the Central Bank decreased by 45.6% in 8 months of the current year. In August, the average interest rate on one-day unsecured transactions (1D AZIR) was 7.28% (6.96% in July) and formed within the interest rate corridor. Overall, the difference between the 1D AZIR index and the refinancing rate fell to a historical minimum in August. On 59% of working days in August, the spread between the 1D AZIR index and the refinancing rate did not exceed 0.05% (both positive and negative spreads). The average volume of 1-day transactions on the unsecured market reached the maximum in August (534 million manats).

There has been no considerable 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. Monetary conditions in advanced economies remain still tight. However, under the conditions of decreasing inflationary pressures in the world, the probability is increasing that the central banks of the leading countries will gradually lower interest rates. The main internal risk factors to push inflation are related to the activation of local cost factors, as well as increasing government spending (8.3% in 8 months of the current year compared to the corresponding period of the previous year) and overexpansion of aggregate demand through the expansion of loans. It is worth noting that the loan portfolio of the banking system grew by 19.5 %, including the business loan portfolio by 18.4 % during the last year.

Overall, current monetary conditions are aimed at keeping inflation within the target range and at stabilizing inflation expectations. If current conditions remain unchanged, in late 2024 and 2025 annual inflation is forecasted to be within the target band (4±2%).

The Central Bank will announce updated forecasts for key macroeconomic indicators in late October 2024. 

Next monetary policy decisions will depend on actual and forecasted inflation, and the dynamics of external and internal risk factors. 

This decision takes effect on 19 September 2024. The information on the next decision on interest rate corridor parameters will be made public on 30 October 2024 accompanied with a related press conference.