On interest rate corridor parameters

01-11-2024

1 November 2024: The Management Board of the Central Bank of the Republic of Azerbaijan has 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 to keep unchanged the refinancing rate has been made considering that the actual and forecasted inflation is within the target range (4±2%), and the analysis of the internal and external condition.

Since the last meeting annual inflation has remained within the target band (4±2%). In September 2024 twelve-month inflation stood at 3.5%, food inflation at 2.9%, non-food inflation at 1.9% and services at 5.7%. Low food and non-food inflation contributed to overall inflation remaining within the target. Annual core inflation stood at 2.9%.  

The external inflation environment remains stable. Over the past period of the year the appreciation of the nominal effective exchange rate (4.9% over 10 months of 2024) made additional contribution to the drop in inflation import.

Foreign trade surplus, the key component of the current account of the balance of payments, amounted to $5.2B over 9 months of 2024. Updated forecasts project a current account surplus of $5.3B as of end-2024 and $5.5B in 2025.  

FX market stability has been maintained and demand has been fully covered at foreign exchange auctions conducted by the Central Bank. The FX market operates amid the balance of payments surplus. However, last month the Central Bank conducted a special sale of $424 million to support foreign currency-denominated government expenditures (government projects and events, defense, decrease of foreign currency denominated liabilities and other strategically important expenditures). Consequently, foreign exchange reserves of the Central Bank declined by $241M over 10 months. The Central Bank sold foreign currency at the expense of $2.1B worth of the foreign exchange purchased from the FX market in 2023. The FX sale allows sterilizing a portion of money supply risen at the expense of purchase-oriented currency intervention of previous years, which underpins a medium-term macroeconomic sustainability.

Monetary policy instruments have been applied taking into account the processes taking place in the financial markets and the changes in the liquidity position of the banking system. In response to the impact of changes in government account balances on liquidity in the banking system, the Central Bank sharply reduced the volume of sterilization operations since the beginning of the year. The issuance of Central Bank notes decreased more than threefold. In October the average interest rate on one-day unsecured transactions (1D AZIR) was 7.48%, which is within the interest rate corridor. Activity in the unsecured market remains high. The average amount of one-day transactions stood at AZN673M in October. 

Although there have been no considerable changes in the balance of risks of inflation since the last meeting, global economic uncertainties, that may potentially push up inflationary pressures, persist. Amid the current geopolitical tension, disruptions in supply chains and international shipping are still on air. On this backdrop, possible fluctuations in commodity prices in global markets may elevate risks of imported inflation. Although the monetary condition started to ease in advanced economies, it remains generally tight. Domestically, risk factors that may push inflation include the activation of cost factors, as well as the rise in budget expenditures (y.o.y. by 8.4% over 9 months) and aggregate demand overexpansion through the credit growth. Note that, over recent one year the banking system’s lending portfolio increased by 19.9%, and the business lending increased by 19.3%.

Overall, the current monetary condition is oriented towards maintaining inflation within the target band and stabilizing inflation expectations. Under the baseline scenario with the current policy annual inflation is forecast to remain within the target band (4±2%) as of end-2024 and in 2025. According to updated October forecasts, annual inflation is expected to stand at 5.1% as of end-2024 and at 5.8% in 2025.   

Future monetary policy decisions will depend on actual and forecasted inflation, and the dynamics of external and internal risk factors. The Central Bank continuously monitors ongoing economic developments and financial markets and deploy all available tools to safeguard price stability.

The next decision regarding interest rate corridor parameters will be announced on 18 December 2024.