25 October 2019, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate by 25 basis points to 7.75 from 8%. The ceiling and the floor of the interest rate corridor were set at ±1.75% range to the refinancing rate.

Actual inflation follows the expected trajectory. Overall annual inflation and its components on the key groups are within the target band. According to updated forecasts, as of end-2019 inflation will be close to the center of the target band (4±2%). Inflation risks are assessed to be balanced by the end of the current year and relate to expansion of aggregate demand in the short-term horizon and mainly to external factors in the medium and long-term.

Next interest rate related decisions will be taken depending on pass-through of internal risks to inflation and external sector developments aiming at maintaining the target inflation parameters.

Inflation. Since the last meeting of the Management Board dedicated to the monetary policy there were no considerable swings in overall level of prices. According to official statistics, in September annual inflation was 2.5%, below the band center.

On the backdrop of expanded consumption, food prices that increase at an annual 5.1% rate still have a considerable share in overall inflation. Amid higher external demand, swings in supply of certain agricultural products in the domestic market and hiked food prices in the world market had an upward effect on the dynamics of food prices. Global prices increased by 3.3% over the past one year, including 10.8% rise in meat products and 4.1% rise in sugar.

Other components of inflation – hike rate of non-food products and services (1.2% and 0.1% respectively) significantly lags behind the center of the target band. Stable administrative prices are the key factors to stipulate low non-food and service inflation rate.

Amid positive dynamics of changes in aggregate demand and price hike for certain food products in the world market, an adequate monetary policy and stable bilateral and multilateral exchange rates have a stabilizing effect on inflation.

Inflation expectations remain stable. According to real sector monitoring (RSM) findings, three-month price expectations decreased in trade and services, increased in non-oil processing and remained unchanged in construction in September relative to the previous month.

Surveys among 4250 households in September 2019 suggest that only 2.4% of respondents expect higher inflation in upcoming 12 months. 41.2% of respondents expect the prices to follow the same level, 37.2% expect lower rising rate of prices, 17.1% expect that prices will nearly remain the same and 2.1% expect the prices to slide.

According to updated macroeconomic forecasts, as of end-2019 inflation will be close to the center of the target band (4±2%). Forecasts suggest that inflation will undergo no considerable change in 2020. 

Monetary condition supports an optimum balance between the inflation target and output gap approaching neutrality. Although the monetary condition has eased in terms of quantity and value since early 2018, output gap fails to fully strengthen in a positive zone due to weaker rise in financial intermediation and lingering structural problems in the economy.

Money base in manat has increased by 8.3% since early year, as of the end year dynamics of money supply will be driven by changes in the balance of a single treasury account.

The Central Bank has decreased the balance of sterilization operations by 44% since early year in light of demand of the economy for money. The Bank diversified its sterilization tools in terms of maturity by issuing 84-, 168- and 252-day notes beginning with September, which is critical in terms of creating conditions for formation of interest rates in the short-term part of the yield curve and supporting activation of the interbank money market.

Amid lower real interest rates lending activity is mainly driven by consumer loans. Credit investments (including banks and NBCIs) have increased by 9.4% since the early year. Loans to households increased by 13%, their share in total loans increased up to 50%. Loans to legal entities increased by 6.3%.

Interest rate corridor parameters of the Central Bank support attractiveness of national currency denominated savings and dollarization indicators keep dropping. Manat denominated savings of individuals increased by 21.3% over 9 months of 2019.

Economic activity preserves its positive dynamics being supported by expanded exports, consumption and non-oil investments. According to official statistics, over current 9 months economy grew by 2.5%, including 3.5% non-oil growth.

Rise in social expenses and consumer loans is mainly accompanied by high import of consumer goods. Over 9 months import of consumer goods increased by 15%, including 19% rise in import of durables.

The RSM-based business confidence index increased in trade and construction, slightly decreased in the non-oil industry and services (seasonal factor) last month.

Amid higher risks of slowdown in global economic activity, albeit being prone to falling over recent months (average price $64.9 over 9 months), global oil prices support foreign trade surplus. Export y/y increased by 4.1%, including 17% rise in non-oil export, growth rate of non-oil import was 10.1%, excluding monetary gold.

The balance of payments surplus contribute to demand higher than supply in the FX market and rise in foreign exchange reserves. Strategic foreign exchange reserves of the country have increased by 11.7% ($5.3B) since early year to $50B. Foreign exchange reserves of the Central Bank increased by 9% to $6.1B.

Inflation risks. In the short-run stabilizing factors prevail in risks balance, which mainly include rebalancing in the FX market amid the balance of payments surplus and foreign exchange reserves that significantly exceed sufficiency norms. The factors that may increase the inflation rate include fiscal stimuli and simultaneously rising money supply, as well as swings in global food prices.

In the medium- and long-term forecast horizon risk factors are still linked to the external sector. In the environment of stronger global de-integration trends and lingering geo-political tensions slowdown in economic growth in partner countries and lower global oil prices may potentially threaten macroeconomic stability through external sector factors. Sensitivity and asymmetry of exchange rate and inflation expectations also remain a potential risk source.

The Central Bank will further continue in-depth monitoring of inflation risks and adequately use tools at its disposal to maintain inflation within the target band.

The decision takes effect on 25 October 2019. Next decision by the Management Board of the Central Bank on the interest rate corridor parameters will be publically disclosed on 13 December 2019.

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