Azerbaijan: Central bank eases further to 8.00 percent from 8.50 percent previously

CAUCASUS / CENTRAL ASIA - In Brief 20 Dec 2023 by Ivan Tchakarov

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The Central Bank of Azerbaijan lowered the refinancing rate by 50bpts to 8.00 percent. The central bank was the last one in the region to transition into easing, having cut the policy rate for the first time only in Nov. Thus, cumulative cuts amount to 100bpts for the year. The central bank pointed to favorable inflation dynamics and the need to reduce pressures on the FX market as the key reasons for the decision. Indeed, inflation has fallen more aggressively in recent months than anticipated, with the CPI decreasing from the peak of 15.6 percent YoY in Sep 2022 to 2.6 percent now (4.0% the midpoint of the targeted 2.0-6.0% CPI range). While the sharp deceleration of food inflation has led the headline index, nonfood and services inflation have also now started to contribute more substantially to subdued price pressures. In turn, less global pressures related to food and energy prices have facilitated the faster-than-expected moderation of inflation. In addition, for the second time in a row, the central bank has alluded to upside pressures on fixed exchange rate as a contributing factor in taking the easing decision. Continuing CA surpluses have led to plenty of hard currency supply to the market, which has forced monetary authorities to intervene to buy foreign exchange for domestic currency. The resulting increase in the money supply thus creates some upside risks to inflation, with the lower policy rates diminishing pressures on the currency within the fixed exchange rate system. Lackluster economic performance has also played a role, with GDP growth having expanded by a mere 0.5 percent YoY ytd (Jan to Oct). We forecast average inflation to drop to 5.4 percent i...