The Management Board of the Central Bank of the Republic of Azerbaijan at its meeting of 21 June 2017 decided to leave the refinancing rate and the ceiling of the interest rate corridor on liquidity operations unchanged and shift the floor of the corridor to 10% from 12 % from 22 June 2017 onward.
The Board mentioned that the non-oil sector has restored its economic growth aided by surplus in the balance of payments (BoP) due higher exports and lower imports. The exchange rate stability of the national currency is further sustaining. The CBA made certain quantitative easing in the monetary policy, yet it continues a conservative monetary policy and notes that the refinancing rate might be reduced in response to the dynamics of the economy and inflation in the second half of the year.
The decision rests upon the following macroeconomic conditions:
Economic activity. The non-oil sector has started to restore its growth over the past period – the sector posted 2.3% growth, trade 3.2%, and the non-oil sector 3.9%. Economic growth in the non-oil sector stemmed from final consumption expenditures, government demand and high net foreign demand.
Further rise in economic growth will, to a considerable extend, depend on the speed of implied structural reforms, the possibility to broaden net external demand, recovery of the investment activity and financial intermediation.
Foreign balance and the exchange rate. In the 1st quarter of 2017 the BoP underwent positive changes – y/y deficit ($-2.5 B) was replaced by surplus ($0.7 B). Surplus of the foreign trade balance has doubled over recent 5 months – both oil and non-oil exports increased, while non-oil import decreased.
Transition to a floating exchange rate has resulted in prevalence of supply over demand in the forex market with parallel higher sustainability of the exchange rate of manat over recent 4 months. No considerable corrections to the macroeconomic policy framework that ensures the exchange rate stability are expected to be made by the yearend.
The monetary environment. The CBA implemented a flexible monetary policy meanwhile targeting money supply and contained the money base early year restoring the size of money supply upon stabilization of the exchange rate given expectations related to transition to the floating exchange rate as part of the adopted money program.
The CBA kept monetary policy tools with different maturities (1, 7, 14 and 28 days) active to cover demand of the economy for money and effectively manage liquidity.
Over the period the value of money in financial markets has mainly been determined within the CBA’s interest rate corridor framework.
The Bank’s monetary policy contributed to management of liquidity in the economy and stable operation of payment systems.
Inflationary processes. According to the State Statistics Committee, average annual inflation is 13.8%. Analyses reveal that inflation is primarily affected by non-monetary factors and basically rests upon expectations and inertia.
The CBA’s periodic surveys across businesses and households suggest that despite slight decrease in inflation expectations amid the stabilization of the exchange rate and neutral size of money supply, they are still considerable.
The CBA Management Board considers that short run inflationary expectations are contained on the backdrop of stable monetary environment and lack of exchange rate volatility and inflation expectations of both the population and businesses should lower in the second half of the year.
The Bank recognizes that the refinancing rate might be reduced in the second half of the year in response to the dynamics of the economy and inflation.
The CBA’s implied transition to inflation targeting, expected outcome of deeper financial stability, adoption and application of new fiscal rules, and institutionalization of the macroeconomic policy coordination frame will allow to more effectively manage medium run inflationary risks.
The CBA Management Board’s next meeting dedicated to the level of the refinancing rate will be held on 1 August 2017.
The press release on the decision of the CBA Management Board will go public on 22 June 2017 at 10.00.