On interest rate corridor parameters

22-01-2025

22 January 2025: 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 the actual and forecasted inflation being within the target range (4±2%), global economic environment, the analysis of macroeconomic trends and the transmission of the monetary policy to the economy.

Annual inflation has remained within the target band since the last meeting (4±2%). As of December 2024, 12-month inflation stood at 4.9%, with price increases of 5.5% for food products, 2.4% for non-food products, and 6.3% for services. Annual core inflation stood at 4.4%.

External factors affecting inflation have been generally stable. The IMF reports that the global commodity price index increased by 4.3% last year. Average weighed annual inflation in trade partners decreased to 11.9% over 11 months of 2024, the significant portion of which was neutralized by 9% appreciation of the nominal effective exchange rate of manat.   

External sector indicators remain favorable. According to the State Customs Committee, in 2024 the surplus of foreign trade balance, the core component of current account of the balance of payments amounted to $5.5B. On this backdrop the foreign exchange market safeguarded stability in 2024, in all FX auctions conducted by the Central Bank demand for foreign currency was fully met. As of end-2024 FX reserves of the Central Bank amounted to $11B. The surplus forecasted in the current account balance ($5.5B) induces to expect that the FX market stability will be ensured in 2025 as well.

Monetary policy instruments are applied based on financial market developments and changes in the banking system's liquidity position. Considering the impact of changes in government accounts on liquidity of the banking system, the Central Bank significantly reduced the volume of liquidity-absorbing operations in 2024. The volume of the Central Bank notes decreased by 6.3 times. In December 2024 the execution of budget spending triggered 1.7% rise in base money, leading to 1.29 basis points drop of the average daily 1D AZIR index over the past period of January compared to December, bringing it down to 6.39%. The unsecured market continues to be active. The volume of average daily transactions in the unsecured money market amounted to AZN627.3M in December 2024, and AZN290M over the past period of January of this year.

There have been no significant changes in the inflation risk outlook since the last meeting. The global risks that may potentially lead to inflationary pressures include possible price swings in global commodity markets amid the current geopolitical tensions. Internal risk factors that may push inflation up include the activation of cost factors and overexpansion of aggregate demand. Aggregate demand may overexpand through the growth of budget spending and lending. Aggregate upward effect of government budget spending and consumer loans on inflation is estimated to be less than 1 percentage point in 2025. Hence, if the current monetary condition persists, inflation is not assumed to deviate from the target band because of the specified demand factors.

Overall, the current monetary policy aims to maintain inflation within the target range and stabilize inflation expectations. With the current policy, annual inflation is predicted to be within the target (4±2%) in 2025 and 2026 under the baseline scenario. According to the forecasts updated in January 2025, annual inflation is expected to be around 5.5% in 2025 and 3.8% in 2026. 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 will employ all available tools at its disposal to maintain price stability in line with its primary mandate. If inflationary pressures subside and inflation expectations remain stable, the option to reduce interest rate parameters may be considered. Moreover, the Central Bank will react adequately in case of the materialization of possible risks related to achieving the inflation target.

Information regarding the next decision on interest rate corridor parameters will be made public on 12 March 2025.