On interest rate corridor parameters

12-03-2025

12 March 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 real sector.

Annual inflation has remained within the target band since the last meeting (4±2%). In January 2025, 12-month inflation stood at 5.4%, with price increases of 5% for food products, 2.6% for non-food products, and 8.4% for services. Annual core inflation stood at 4.3%.

External factors affecting inflation have been generally stable over recent months. The IMF reports that the global commodity price index increased by 8.5% annually in February 2025. In January average weighed annual inflation in trade partners stood at 10.7% year-over-year. 9% appreciation of the non-oil-gas nominal effective exchange rate of the manat in 2024 was followed by its 1.5% depreciation over two months of 2025. 

External sector indicators remain favorable. In 2024, current account surplus of the balance of payments amounted to $4.7B (6.3% of GDP). According to the State Customs Committee, in January 2025 the surplus of foreign trade balance amounted to $1B (year-over-year up by 40.5%). According to the recent estimates, there is a probability that the current account forecast will improve by the end of 2025 compared to 2024 and the previous forecast.   

Monetary policy instruments are applied based on financial market developments and changes in the banking system's liquidity position. Average interest rates in the short-term money market move within the interest rate corridor of the Central Bank. Note that, the decrease in balances of government accounts at the end of the previous year had an upward effect on the banking system liquidity. Consequently, at the beginning of the current year interest rates in the interbank money market dropped compared to the peak level (1D AZIR 7.68% in December 2024). In January and February average daily 1D AZIR was 0.6 and 0.2 percentage points lower compared with December 2024. Efforts continue to improve the operational framework of monetary policy. In February 2025 the Central Bank changed the terms and conditions of standing facilities and open market operations. The duration of one day standing deposit and reverse repo transactions was changed from 24 hours to overnight. The Central Bank also removed the requirement for a minimum number of participants in note auctions. 

There have been no significant changes in the risk balance of inflation since the last meeting. Global risks that could potentially lead to inflationary pressures include possible price swings in global commodity markets amid current geopolitical tensions and trade wars. Given high global uncertainty, particularly regarding the impact of exchange rate fluctuations in certain countries and tariff increases on inflation, there is a need to take a break in making changes to interest rate corridor parameters. Domestic risk factors likely to push inflation up include the activation of cost factors and overexpansion of aggregate demand. The Central Bank also continuously monitors possible effects of lending activity on price stability.

Overall, the current monetary policy aims to maintain inflation within the target range and stabilize inflation expectations. With the current policy, annual inflation is still predicted to be within the target (4±2%) in 2025 and 2026 under the baseline scenario.   

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. If actual and forecasted inflation subside, the option to reduce interest rate parameters may be considered. Moreover, the Central Bank will react adequately in case of the realization of possible risks related to inflation.

Information regarding the next decision on the interest rate corridor parameters will be made public on 23 April 2025, accompanied by a related press conference.