Monday, April 9, 2018

Azerbaijan cuts rate 200 bps for 2nd time on low inflation

     Azerbaijan's central bank cut its benchmark refinancing rate by 200 basis points for the second time in a row, pointing to single-digit inflation, a positive foreign sector, a stable foreign exchange market and intensifying economic activity.
      The Central Bank of Azerbaijan (CBA) has now cut its rate by 400 basis points this year as it slowly unwinds four rate hikes two years ago that were aimed a bolstering confidence in the manat currency and curb inflation after the plunge in global crude oil prices.
       Between February and September 2016 the CBA raised its key rate by 12 percentage points and then kept the rate steady until February this year when it cut it by 200 basis points and said further cuts were available as it gradually transitions to a neutral monetary policy.
       Recent forecasts show macroeconomic stability and economic activity will intensify throughout the year, providing a basis for a gradual normalization of monetary conditions, the CBA said in today's statement by its board.
      Azerbaijan's inflation rate fell to 4.7 percent in February from 5.5 percent in January, sharply down from 2017 highs of 14 percent in July and August, with the CBA attributing the fall to management of money supply, changes to world food prices and a decline in inflation expectations.
       Illustrating improved exports, CBA said foreign trade turnover had risen 31 percent in January-March from the same period last year, with non-oil exports up by 37 percent, helping boost Azerbaijan's strategic currency reserves to US$2.2 billion by the end of the first quarter.
      The CBA said Azerbaijan's economy grew by 2.3 percent in the first quarter of this year, with the non-oil sector growing by 3 percent. Last year the country's Gross Domestic Product grew by 01. percent, up from 3.8 percent contraction in 2016.
        Azerbaijan's balance of payments is expected to remain favorable the rest of this year, helping keep the exchange rate of the manat stable, one of the important factors affecting inflation and inflation expectations that is also helping the de-dollarization of bank deposits.
        Oil and gas account for about 95 percent of Azerbaijan's exports and 75 percent of government revenue so the fall in world crude oil prices in the second half of 2014 hit the economy hard, undermining confidence in the manat.
        From 2011 the CBA effectively pegged its manat to the U.S. dollar so the CBA had to draw heavily on its reserves to defend it. But as local depositors switched into U.S. dollars, the CBA was forced to abandon first its dollar-peg in early 2015 and then later that year 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. Over the last 12 months, the manat has been trading close to 1.7 to the U.S. dollar.


Post a Comment