Gazprombank: Central Bank of Azerbaijan expected to extend pause in monetary tightening

At its meeting on July 29, it is expected that the Central Bank of Azerbaijan (CBAR) will extend its pause in monetary tightening and keep the refinancing rate unchanged at 7.75%, writes Gulnara Khaidarshina, deputy head of research at Russia’s Gazprombank and chief CIS economist, Report informs.

She highlighted the following arguments in favor of such a decision:

- a stable dynamic in AZN-denominated deposits and the level of dollarization;

- signs of stabilization of growth in consumer prices due to non-monetary anti-inflationary measures,

- a stable situation on the domestic FX market.

“Since the previous meeting in April, when the CBAR kept the refinancing rate unchanged at 7.75%, there have been no significant changes in the balance of risks, which remains skewed toward acceleration of inflation. CPI in June remained beyond the CBAR’s target range (4%+/-2 pps), exceeding its upper bound by 820 bps and the refinancing rate by 645 bps.

At its June meeting, the CBAR noted that while inflation in trade partner countries is gathering pace, the current account surplus and appreciation of the nominal FX rate are significantly limiting imported inflation. Inflationary risks are being contained by previous rate hikes, a stable AZN exchange rate and the government’s implementation of non-monetary anti-inflationary measures,” she wrote.

Below we present a more detailed analysis of arguments in favor of a decision to keep the refinancing rate unchanged:

Despite the negative real rate, there have been no signs of a significant increase in dollarization, while the dynamic of AZN-denominated deposits remains stable. According to the CBAR, the volume of household AZN-denominated deposits corrected slightly downward in May (-1.9% MoM) while increasing 14.2% YTD and 31.4% YoY, she noted.

“Despite heightened external risks, dollarization of retail deposits rose slightly in May (to 41.2%) but remained 1.1 pps below the recent high seen in March. To remind, the leading rating agencies cited dollarization of deposits as one of the factors behind potential pressure on Azerbaijan's sovereign ratings. Therefore, we believe that the absence of a pronounced uptrend in dollarization allows the CBAR to extend its pause in rate hikes and focus, along with the government, on non-monetary anti-inflationary measures,” she said.

“In our view, a decision to keep the rate unchanged amid a positive dynamic in AZN deposits and the absence of a trend toward a sharp increase in dollarization will not exert pressure on sovereign ratings of Azerbaijan and the country’s eurobonds.”