Azerbaijan becomes the last CCA country to cut rates

CAUCASUS / CENTRAL ASIA - In Brief 01 Nov 2023 by Ivan Tchakarov

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The Central Bank of Azerbaijan cut the policy rate by 50bpts to 8.5 percent on Nov 1. There was some intrigue about this policy decision given the recent downpath of inflation and the fact that the central bank was the last holdout in the CCA space regarding the transition to easing. While it had signaled the end of the rate-hiking cycle already at its policy meeting on Jun 21st, it had then crafted a message of caution, stressing existing inflation risks. At the same time, as we had argued at its previous policy decision on Sep 20, the central bank introduced a somewhat dovish message, possibly paving the way for a rate cut. While in our baseline scenario we had penciled in the first rate cut for early 2024, we had recognized the higher chances of an earlier rate reduction.The Central Bank has pointed to lower food prices and the need to reduce pressure on the exchange rate as key reasons for the cut. Headline inflation has indeed lost a lot of pace recently, with the CPI falling from 13.6 percent YoY in Jan to only 5.1 percent YoY in Sep vs the CPI target of 4+/-2 percent. The main driver of the deceleration has been food inflation, which collapsed from its peak of 21.8 percent YoY last Sep to 4.5 percent YoY this Sep (Graph 1). Nonfood and services prices have also made a contribution to the general decline in headline inflation. In addition, the lackluster performance of the economy has certainly made an impact on the more subdued evolution of nonfood and services prices (Graph 2). Interestingly, the central bank made a particular reference to the exchange rate, arguing that the upward pressure on the currency (arguably in real terms) has led to FX interventions to...