IMF says Azerbaijan may need further monetary tightening

Further monetary tightening would be needed to reduce the risk that inflation and inflation expectations become more entrenched and difficult to reverse, Report informs, citing the Concluding Statement of the International Monetary Fund (IMF) on the 2022 Article IV consultation from May 25 to June 7, 2022, in Baku.

"The increase in the CBA’s discount rate has so far been relatively limited compared to the previous episode of higher inflation, and also compared to regional peers (see chart). The CBA must also be ready to keep pace with expected increases in global interest rates. At this unique moment, where tradeoffs are particularly difficult, clear CBA communication becomes even more important," the statement reads.

The statement reminds that in response to increasing inflation, the CBA has appropriately reversed monetary easing and increased interest rates in the second half of 2021 and in early 2022.

"The increase in inflation reflects mainly external and non-monetary domestic factors, including the increase in imported food prices and the adjustment and liberalization of some regulated fuel and water tariffs in early 2021. Staff agrees with the CBA’s assessment that imported inflation has been an important driver. However, inflation has now become more broad-based, and the risks exists that it will remain elevated in the future," it says.

According to IMF forecasts, consumer price growth will average 12.3% in 2022, 9.5% in 2023, 7% in 2024, 5% in 2025, 4% in 2026 and 4% in 2027.

The discount rate is 7.75%, the lower limit of the interest corridor is 6.25%, and the upper limit is 9.25%.