Azerbaijan: Central bank holds policy rate constant, signals end of rate-hiking cycle

CAUCASUS / CENTRAL ASIA - In Brief 21 Jun 2023 by Ivan Tchakarov

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The Central Bank of Azerbaijan kept the policy rate unchanged at 9.0 percent on Jun 21st. There was some underlying intrigue in the runup to this meeting as monetary authorities were seemingly still not done with the rate-hiking cycle, having been consistently sending hawkish messages to the market. The pause was, however, in line with our baseline scenario, although we recognized one last rate increase was also a possibility given the still elevated levels of inflation. In the event, we anticipate that this will formally end the rate-hiking cycle and serve as a transition to a more neutral policy stance whereas the current level of the policy rate is kept at this level at least until the last quarter of the year. The Central Bank of Azerbaijan was the only one in our space that was still hiking, but the peak of the cycle may now have been formally reached. The central bank has hiked the policy rate relatively modestly from 6.25 percent in Aug’2021 to 9.00 percent now (last increase in early May this year). The small move relative to the surge in inflation has been driven mainly by the fact that Azerbaijan maintains a fixed exchange rate policy, which has been viewed by the central bank as an important tool to fight price growth. This has, however, resulted in Azerbaijan having the most negative real interest rate in the region, forcing the monetary authorities to continue keeping a relatively hawkish policy stance. Nevertheless, the gradual decline in inflation may just have provided the right reason for the central bank to pause today (21st of June). We see some scope for the policy rate to be lowered only early in 2024. Inflation has started to lose momentum but rem...