Azerbaijans’s central bank lowered its benchmark refinancing rate by another 25 basis points to 9.0 percent but signaled that it may pause in further easing as inflation is now forecast to settle within the target range in 2019.
It is the Central Bank of the Republic of Azerbaijan’s (CBA) 6th rate cut since February 2018 and its policy rate has now been lowered by a total of 600 basis points since then.
In February, when the rate was cut by 50 basis points, CBA said it would continue to normalize monetary conditions but today it said recent monetary easing had contributed to the normalization of monetary conditions and rising domestic demand is expected to help narrow the output gap.
“The Central Bank will adjust the parameters of the interest rate corridor in response to actual and forecasted inflation rate and the realization of risk scenarios,” CBA said, adding today’s rate cut lowers the ceiling of the interest rate corridor to 11 percent and the floor to 7.0 percent.
Azerbaijan’s inflation rate has tumbled since mid-2017 when it hit 14 percent and decelerated faster than expected in 2018, triggering CBA’s rate cuts as its main priority is to keep inflation within the target range and promote economic activity.
CBA lowered its inflation target for 2019 to 4.0 percent, plus/minus 2 percentage points from last year’s target of 6-8 percent.
However, CBA cautioned there are still uncertainties related to external factors, such as volatile oil prices, slower global growth and higher commodity prices. Azerbaijan’s economy remains heavily dependent on oil.
The external environment remains favorable, CBA said, noting exports had risen 42.6 percent in the first two months of the year, including a 16.4 percent rise in non-oil exports, resulting in a trade surplus of US$986.3 million.
Foreign exchange reserves have also risen 4.1 percent this year to $46.6 billion and the economy grew 2.9 percent year-on-year in January while business confidence has improved in non-oil processing and trade while it has declined in construction and services in the last 2 months.
The exchange rate of Azerbaijan’s manat has been largely steady since mid-2017 around 1.70 to the U.S. dollar.
Following the fall in crude oil prices in mid-2014, the manat came under heavy pressure as local depositors began switching into U.S. dollars. At that point, the manat was effectively pegged to the U.S. dollar so the CBA had to draw on its reserves to defend it.
But by early 2015 the CBA was forced to abandon its dollar-peg and then later that year it also abandoned a dollar-euro basket peg.
In December 2015 the CBA then switched to a floating exchange rate regime that finally helped stabilize the exchange rate.
The Central Bank of Azerbaijan issued the following press release: