CBA reduces discount rate

Central Bank of Azerbaijan (CBA) passed a decision to reduce the interest rate from 7.25% to 7%, setting the lower limit of the interest corridor at 6.5%, and the upper limit – at 7.5%, Report informs, citing CBA.

The next decisions on parameters of the interest corridor will be directed to preserving optimal balance among keeping the inflation rate in a targeted interval, maintaining financial stability, and supporting economic activity.

Dynamics of inflation and inflationary expectations

Since the last meeting of the Management Board on monetary policy, the annual inflation rate has fallen. According to official statistics, the deflation made up 0.5%, annual inflation –2.9% in May.

In the past twelve months, inflation was 5.7% on food products, 1.4% on non-food products, and 0.4% on services. The reduction in consumption and investment costs and narrowing of the total capital amid the current uncertainties act as a primary factor of disinflation.

The seasonal decrease in prices of agricultural products and global food prices (10.5% in five months of 2020) also caused a decline in food inflation.

According to the monitoring of the real sector, the inflation expectations dropped in the last month. The results of May's survey the inflation expectations on the fields of non-oil industry, construction, trade, and service have fallen compared to the previous month.

Forecasts updated in June show that the highest supposed inflation for the end of 2020 is 3-3.55, which is within the target interval (4±2%). Depending on the economic processes, the forecasts will regularly be updated until the end of the year.

Indicators of the global environment and foreign sector

Easing quarantine regimes in some countries, wide fiscal and monetary measures led to positive impulses for economic revival and markets. However, economic activity remains close to the lowest levels in the past decades.

An increase in demand and updated OPEC+ deal had a positive impact on the recovery of oil prices. Brent crude price was $40 a barrel on average in June, up $32.5 or 23% from May, $27.1, or 48% from April.

Although the export fell 19% in the five months of 2020, there was a surplus in the foreign trade balance. The inclinations of decline in imports have a balancing impact on external balance. If we consider the facts mentioned above, there will be a surplus in the current account of the balance of payment for the first half of 2020.

Monetary condition

Since the last meeting, liquidity and lending were also affected by decisions on monetary policy, state budget expenditures, regulating concessions for support to population and business.

The situation in the financial market remained stable in May. Demand exceeded supply in auctions held by the CBA, and the demand was mainly related to import. The stabilization of the situation in the currency markets of Azerbaijan's partner countries is accompanied by the stabilization of the dynamics of nominal and real effective exchange rates of the manat.

Monetary based has risen by 8% since late April, declined by 10.6% since early 2020.

CBA's monetary policy instruments were applied within the parameters of the interest corridor. Demand exceeded the supply in the auctions on the attraction of deposits and placement of short-term notes, profitability on these instruments has neared the lower limit of the interest corridor.

Interest rates on deposits and savings, as well as new loans in manat, changed in different ways for individuals and legal entities. The increase of maximum interest rate on insured savings in manat since June 1 is expected to have a positive impact on the de-dollarization processes.

Measures to support population and business, including the execution of appeals on the restructuring of loans, subsidization of interests, and broadening of guarantee support, allow softening in lending during the pandemic.

Economic activity

The continued to negatively affect the domestic economic activity in Azerbaijan in May and June. According to the CBA monitoring in real-sector enterprises, the business confidence index was in a negative zone on the non-oil industry, construction, trade, and services in May.

In the five months of 2020, the economy kept growing in the base fields of the economy (non-oil and non-gas industry and agriculture) continued.

All components of the total demand slipped. Retail trade turnover dropped by 1.7%, paid services – by 14.9% in January-May. Capital investment in the non-oil sector fell by 16.7%.

The government's fulfillment of obligations on social expenditures, and support measures, and synchronized macroprudential measures prevent the economic activity from declining more and allow losses in the revenues of economic subjects to be compensated.

Inflationary risks

The balance of inflationary risks is related to the pandemic's impacts on global economic activity and Azerbaijan's economy. There are still uncertainties about the depth and continuation of these impacts. The main risk regarding the external environment is a sharp decline in the oil price, which may be arisen from the second wave of the COVID-19, the trade war between the US and China, and socio-political tensions in other countries. As new normalities emerge, the national economy has started a rebalancing process. The rebalancing should allow the transfer of changes in the external environment to the internal environment, protection of balance between the macroeconomy and financial stability by supporting economic activity and employment.

In the next meeting on the parameters of interest corridor, changes in the balance of risks, the conformation of macroeconomic stability targets with the proprieties to support economic activity will be taken as a basis. Central Bank will further take possible measures to preserve the macroeconomy and financial stability, keep the inflation within the announced target.

The decision enters into force on June 19, 2020. The CBA will announce the next decision on the parameters of interest corridors on July 30, 2020.