Russia’s Gazprombank expects that the Central Bank of Azerbaijan (CBA), taking into account increased inflationary risks, will continue to raise the refinancing rate by 25 base points to 8.25% in December, said Gulnara Khaidarshina, deputy head of research at Gazprombank, chief CIS economist, Report informs.
“At its scheduled meeting on Friday, the CBAR resumed its cycle of refinancing rate hikes with a 25 bps increase to 8%. We expected the rate to remain unchanged amid an ongoing positive dynamic of deposits in the national currency and a decrease in the dollarization of deposits, with a likely adjustment of the interest rate corridor.
In addition, in order to fine-tune monetary conditions, the Central Bank of Azerbaijan raised the lower bound of the interest corridor by 1 pp to 5%, while maintaining the upper bound at 9.25%. This will enhance the CBAR’s ability to regulate lending activity in the economy,” she noted.
Commenting on the balance of risks in the economy, the CBAR noted that inflationary pressure continues in Azerbaijan, as is the case in most CIS countries, and that actual inflation is being affected by inflationary processes in key trading partners. The Central Bank noted that supply factors, which are the main drivers of inflation, are stable. In this regard, the year-end inflation forecast was raised.
“At the same time, the CBAR still expects deceleration of inflation in 2023,” she said.
The CBAR mentioned the following key arguments in favor of raising the rate:
-Azerbaijan's economy continues to recover, with the non-oil and gas sector being the main driver. The CBAR reported that all components of aggregate demand are creating conditions for maintenance of high economic activity. In 9M22, Azerbaijan's economy grew by 5.6% YoY (vs. 4.8% YoY over the same period last year), while the figure in the non-oil and gas sector reached 10.1% YoY. The Central Bank noted that tourism and catering (+74% YoY), transport and storage (+27.2% YoY), information and communications (+15.5% YoY) and construction (+13.3 YoY) showed the largest growth in the non-oil and gas sector of the economy, while investment in the latter increased by 18.1% YoY in 9M22. At the same time, the Central Bank emphasized that the increase in state budget spending following the recent revision will provide additional support to economic activity in 2023.
-Demand for loans remains high amid strong economic activity. According to the Central Bank, investment in lending by banks and non-bank credit organizations increased by 3% MoM in September and 23.5% compared with the same month last year.
-Inflation has accelerated since the September meeting. In September, annual inflation reached 15.6% YoY, while average annual inflation reached 13.4% YoY. The CBAR noted that the greatest inflationary pressure is being observed in the food segment, the contribution of which to annual inflation in September amounted to 9.4 pps. At the same time, the contributions of non-food products and services were less significant at 2.5 pps and 3.7 pps, respectively. The Central Bank’s analysis of factors driving consumer price growth showed the decisive influence of imported inflation, which is leading to a higher cost of production.
-Inflation expectations remain high. September polls showed that 20% of households expect inflation to accelerate over the next 12 months. At the same time, inflation expectations among enterprises in the non-oil industrial, trade and construction sectors increased.
The CBAR also noted a persisting disinflationary effect from an increase of the nominal effective exchange rate and the activation of instruments to sterilize liquidity in the banking system. The effect of decisions to normalize monetary conditions made in 2022 will materialize over the remaining months of this year, as well as in 2023.
“Commenting on the balance of risks in the economy, the CBAR noted that the latter is mainly being influenced by external factors. The IMF’s global inflation outlook for 2022-2023 provides grounds to expect higher price growth than previously forecasted. On the other hand, the greater likelihood of a recession in the global economy may lead to heightened volatility in financial and commodity markets. At the same time, the Central Bank stressed that domestic macroeconomic policy will be aimed at mitigating these risks (including through the introduction of a fiscal rule). This will also be facilitated by ongoing improvement of the operational framework of monetary policy,” she added.
The CBAR did not provide any signals regarding the trajectory of the refinancing rate, although it did indicate a possible further narrowing of the interest rate corridor, which would also tighten monetary conditions.
Subscribe to our Twitter page
