16 September 2022, Baku: The Management Board of the Central Bank of the Republic of Azerbaijan left the refinancing rate unchanged at 7.75%, the floor of the interest rate corridor at 4% and the ceiling at 9.25%.

Since the last meeting dedicated to the monetary policy, there has been no dramatic change in an actual inflation rate. Given the time lag of the effect of the decrease in global food prices and indicators that characterize logistic expenses, the forecast that inflation will be lower than the current level by the end of the year remains unchanged. The inflation forecast for 2023 has been revised down.

Monetary factors continue driving inflation down. The balance of payments (BoP) surplus contributes to the increase of the supply in the FX market. The Central Bank makes purchase oriented interventions to the FX market. Higher strengthening of the nominal effective exchange rate (NEER) since the last meeting was one of the factors to curb inflation.

The Bank initiated the implementation of a new monetary policy operational framework early September aided by the activation of liquidity absorbing operations. It strengthens the downward pressure of monetary factors¹ on inflation and contributes to sustaining price stability in the medium term. A new configuration of monetary policy tools also allows shaping an active interbank market.

External sector. External sector indicators have remained favorable since the last meeting.

According to the BoP, current account surplus accounts for 27.6% of GDP. High world prices for export products, realization of non-oil export potential, as well as rising money remittances to the country contribute to the formation of a large current account surplus. Over 7 months non-oil export yoy increased by 24.2%. Surplus of foreign trade, the main component of the current account, has hiked by 3 times yoy over 7 months.

Forecasts suggest that the current account will be in surplus in 2023 as well along with the end of 2022. International organizations forecast that global prices of the goods that form the basis of the Azerbaijani export will remain high in the year to come.
On the backdrop of the BoP surplus, strategic foreign exchange reserves increased by 5.1% or $2.7B to $55.9B over 8 months of 2022.

Supply still prevails over demand at FX auctions of the Central Bank. In general, supply exceeded demand at 77% of the auctions held since early year. The SOFAZ saved considerable amount on sales. Starting from April of this year, payment of direct foreign exchange expenses of the state budget mainly from state's foreign exchange revenues also affected supply and demand ratio at auctions. The Bank made $606.7M worth purchase-oriented interventions to the FX market ($473.8M in April-August).

Economic activity. All aggregate demand components contribute to high economic activity.

Over 8 months of 2022 GDP increased by 5.8% in real terms, and non-oil GDP increased by 10.3%.

Real sector monitoring by the Central Bank suggests that, in August the business confidence index increased in trade and remained nearly unchanged in the non-oil industry and services compared with the previous month.

Over 8 months of 2022 retail trade turnover yoy increased by 2.8% and non-oil investments by 22.5%.

Some 16.2% rise in state budget spending over 8 months weighed on both consumer and investment demand. Large-scale reconstruction efforts in the territories liberated from occupation continue to support economic growth.

Inflation. There has been no dramatic change in actual annual inflation since the last meeting.

Despite downward pressure of seasonal factors, in August inflation stood at 0.9%. Some 1.2% rise in the price of food products along with the rise in non-food and service prices conditioned monthly inflation.

Annual inflation was 14.2%, and average annual inflation was 13.2% in August. Core inflation was 12.1% on annual and 10.2% on average annual.

Rising inflation was driven by food price hike more. In August, food prices made 9.1 pp, non-food prices 2.1 pp and service prices and changes in tariffs 3.1 pp contribution to annual inflation.

According to analysis, cost factors of foreign origin prevailed among the factors that weigh on the dynamics of inflation. Whereas global food prices dropped by 1.9% in August its annual growth stands at 7.9% and passes through to domestic prices with a certain time lag. At the same time, while the indices that characterize supply chain related expenses have dropped over recent months, in general they remain high.

Cost factors of foreign origin affect both consumer and producer prices. The producer price index increased on non-oil and agricultural products by 0.1% and 1% respectively in August. Over recent 12 months, these indicators have increased by 16.5% and 19.3% respectively.

Inflation expectations have nearly remained stable since the last meeting. Findings of the monitoring of real sector enterprises suggest that inflation expectations decreased in construction, remained nearly stable in services and slightly increased in trade and the non-oil industry in August compared with the previous month.

The forecast that annual inflation will be lower than the current level by the end of the year remains unchanged. Annual inflation forecast for 2023 was revised down due to the expected change in global food prices and a high base of inflation in 2022.

Monetary condition. The monetary condition has been driving down inflation since the last meeting.

Some 6.1% strengthening of the NEER of the manat over 8 months was of the main factor to contain inflation. Depreciation of national currencies in certain partners in July and August had an additional push effect on the NEER.

Introduction of a new monetary policy operational framework is critical in terms of support for price stability both in the current period and medium-term.

Introduction of the monetary policy tools on 01.09.2022 is accompanied by higher volume of liquidity absorbing operations, as expected. Amid structural liquidity surplus in the banking system, demand for Central Bank’s sterilization tools, in particular standing deposit facilities is high. Maintenance of required reserves by banks in line with the new ratios from September 15 onward drive down inflation by means of liquidity management.

The growth forecast of money supply as of the yearend has been revised down due to kick-off of a new range of absorbing operations.

The Bank may review conduction of various maturity note and Repo auctions for additional sterilization over the remaining period of the year depending on the translation of fiscal operations on the monetary condition and the situation in the interbank market.

A new configuration of monetary tools and a new alternative operational platform are positively translating to the interbank lending market. Over the past period of September AZN101M worth total 12 transactions were concluded on the Bloomberg trading system.

Yield on government securities and nominal interest rates on deposit and loan interest rates have slightly increased since the last meeting.

In August 2022 lending on banks and non-bank credit institutions increased by 0.8% vs the previous month, by 11.8% vs early year and by 22.6% yoy. Effects of the monetary policy implemented by the Central Bank and the macro prudential policy on lending activity is expected to elevate gradually.
Balance of risks. There has been no dramatic change in the balance of inflationary risks.

Factors that may increase inflation are mainly of foreign origin. Risks of foreign origin mainly include geopolitical tension and rising cost of transportation-logistics amid the rise in the number of cases of infection with COVID-19, forecasts on a gradual decrease in world commodity prices not coming true in the upcoming period, and resulting higher inflation. These risks will be managed with coordinated anti-inflationary measures by the Government and the Central Bank, by maintaining an adequate monetary condition. Introduction of the new monetary policy operational framework allows to more effectively regulate the monetary condition. Not allowing excess increase in aggregate demand in 2023 and the medium term will support macroeconomic stability and price stability.

Next interest rate corridor parameters related decisions will be taken in light of pass-through of the developments in the global environment to domestic inflation and financial markets, as well as the balance of internal and external risks.

This decision takes effect on 16 September 2022. Next monetary policy decision will be announced on 28 October 2022 aided by a press conference.

[1]Monetary factors of inflation are defined as the factors within the sphere of influence of the Central Bank (money supply, exchange rate etc.,).