On interest rate corridor parameters

18-12-2024

18 December 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 the refinancing rate unchanged has been made considering that the actual and forecasted inflation is within the target range (4±2%), and the analysis of macroeconomic trends.

Since the last meeting annual inflation has remained within the target band (4±2%). In November 2024, 12-month inflation stood at 4.4%, food inflation at 4.4%, non-food inflation at 2.2% and services at 6%. Low food and non-food inflation contributed to overall inflation remaining within the target.

The external inflation environment is stable. Global commodity price index increased merely 0.7% year-over-year (IMF). Over the past period of the year the appreciation of the nominal effective exchange rate (7.1% over 11 months of 2024) made additional contribution to the drop in inflation import.

Current account surplus of the balance of payments amounted to $4B (7.2% of GDP) over 9 months. According to the State Customs Committee, foreign trade surplus, the core component of the current account balance, amounted to $5.6B over 11 months of 2024.

FX market stability has been maintained and demand has been fully covered at foreign exchange auctions conducted by the Central Bank. As previously announced, the Central Bank conducted planned foreign exchange sales in November 2024 to cover one-time state expenditures by using the foreign currency it acquired from the domestic market in 2023. However, as of end-November 2024 Central Bank’s foreign exchange reserves amounted to $10.9B, which exceeds internationally accepted sufficiency norms. The current level of Central Bank’s foreign exchange reserves exceeds three-month import of goods and services by two times. The forecasted current account surplus allows to expect that the FX market stability will be maintained in 2025. According to the October forecast, in 2025 current account surplus is expected to stand at $5.5B.

Monetary policy instruments are applied taking into account financial market developments and changes in the liquidity position of the banking system. In response to the impact of changes in government account balances on banking system liquidity, the Central Bank has sharply reduced the volume of liquidity absorbing operations since the beginning of the year. The volume of the notes issued by the Central Bank decreased by more than 4.6 times over the past period of the year. In November and over the past period of December 1D AZIR index was 7.66% and 7.79% respectively, remaining within the interest rate corridor. Activity in the unsecured market remains high – average daily transactions in the unsecured money market amounted to AZN627.3M in November and AZN402.3M over the past period of December. 

It is a positive sign that financial sector’s sustainable financing sources have been expanding recently, attributable to consistent reforms aimed at improving the monetary policy framework and enhancing financial sector resilience. Over 11 months of the year the unique number of term deposits in national currency increased by 30.3%, and their amount increased by 20.9% (AZN945.3M) – a clear indicator of the trust in the national currency.

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, possible price volatility in international commodity markets trigger risks related to the rise in imported inflation. While Advanced Economies started monetary easing, in general, the monetary condition remains tight. Internal risk factors, likely to push inflation, include the activation of cost factors, overexpansion of aggregate demand through the increase in budget expenditures (y.o.y. up by 6.5% over 11 months) and higher lending. In November, the lending portfolio of the banking system increased by 19.6%, and the business loan portfolio increased by 18.7% year-over-year.

Overall, the current monetary policy is oriented towards maintaining inflation within the target band and stabilizing inflation expectations. Under the baseline scenario, with the current policy, annual inflation is forecasted to remain within the target band (4±2%) as of end-2024 and in 2025.  

Decisions regarding the parameters of the interest rate corridor will depend on actual and forecasted inflation, and the dynamics of external and internal risk factors. The Central Bank continuously analyzes economic developments and monitors financial markets. The Bank is committed to employ all available tools at its disposal to maintain price stability in line with its primary mandate.

The schedule of the publication of decisions regarding interest rate corridor parameters for 2025 will be announced at the end of the year.