Azerbaijan: Central bank offers no surprises, keeps policy rate constant, but modifies message

CAUCASUS / CENTRAL ASIA - In Brief 26 Jul 2023 by Ivan Tchakarov

---

The Central Bank of Azerbaijan kept the policy rate constant at 9.0 percent on Jul 26th. There was little uncertainty about this decision given the broader message that the central bank has been sending to markets in recent months. While it had signaled the end of the rate-hiking cycle already at its previous policy meeting on Jun 21st, it had crafted a message of caution, stressing existing inflation risks. In that sense, today's decision to keep the policy rate unchanged at 9.0 percent did not offer any surprise and was much anticipated. At the same time, there was a visible shift in the tone of the message in the direction of increased dovishness. In particular, policy makers pointed to the gradual, yet steady, moderation of inflation pressures. Indeed, while headline inflation is still running at double digits at 10.6 percent YoY, we have now two consecutive months when all components of inflation, including food, nonfood and services, have been inching down (Graph 1). As a result, all individual components are now contributing to the moderation of inflation pressures (Graph 2). Most importantly, the central bank argued that the factors that are leading to lower inflation pressures have started to play a more important role in recent months. These include lower global food inflation, more modest price pressures in key trading partners, and tighter monetary policy. In addition, monetary authorities omitted the direct reference to the forecast 8.3 percent end-year inflation and argued that the balance of inflation risks is now consistent with increased probability of price growth closing in on the 4 percent CPI target towards the end of the year or early 2024. We tak...