Central Bank: Increasing nominal effective exchange rate may reduce inflation in Azerbaijan

The exchange rate effect on reducing prices in Azerbaijan could be achieved only through appreciation of the nominal effective exchange rate, Taleh Kazimov, governor of the Central Bank of Azerbaijan, said in an interview with Global Finance, Report informs.

He noted that interest rate and exchange rate channels complement each other in Azerbaijan, requiring significant coordination between fiscal and monetary policies.

“The central bank rarely intervenes in the foreign currency market. As mentioned above, the State Oil Fund supplies the state budget with manat by converting its foreign currency into the market. We just organize these auctions between the fund and commercial banks. These actions do not influence the foreign currency reserves of the central bank. We primarily conduct the monetary policy through an interest rate channel to affect aggregate demand,” Kazimov said.

Oil revenue does not directly affect inflation through the aggregate demand channel, he noted. According to the institutional framework, the State Oil Fund (SOFAZ) receives all oil and gas revenue and transfers the predefined amount of that revenue to the state budget in accordance with the fiscal rule, he added.

“As mentioned, the main concern for the central bank was high inflation; the fundamental question was the source of inflationary pressure. Our analysis showed that prices in the domestic market were elevated due to external supply factors. It is quite clear that the central bank will be less efficient in curbing externally driven inflationary pressure with monetary policy tools. During this time, Azerbaijan imported inflation from key trading partners, some of which have been significantly hit by high global food and energy prices. Our main strategy was to ensure that demand factors were under control by increasing the policy rate. Additionally, we maintained the stability of local currency in periods of excessive foreign currency supply,” Kazimov said.