Friday, February 1, 2019

Azerbaijan cuts rate another 50 bps on low inflation risks

     Azerbaijan's central bank lowered its policy rate by another 50 basis points to 9.25 percent and said it will continue to normalize monetary conditions as the risk of inflation is relatively low in light of an improvement in the external sector, a balanced foreign exchange market, a low level of inflation and inflation expectations, and the adoption of fiscal rules.
     It is the Central Bank of the Republic of Azerbaijan's (CBA) fifth rate cut since February 2018 and its key rate has now been cut by 575 basis points.
     With today's rate cut, CBA's interest rate corridor also shifts downward, with an upper limit of 11.25 percent and a lower limit of 7.25 percent.
     Azerbaijan's inflation rate has come down sharply since mid-2017 when it hit 14 percent and decelerated faster than expected this year to 2.3 percent in December and November 2018.
      In October the CBA's board lowered its forecast for inflation to end 2018 around 3-4 percent from an earlier forecast of 6-8 percent and then in its December statement it lowered the forecast further, saying it expected inflation to stabilize around its November level.
      In today's statement the board said the factors that help stabilize inflation within the target are strengthening, including the macroeconomic framework, a positive balance of payments, a sustainable exchange rate and low price increases.
      CBA has lowered its inflation target for 2019 to 4.0 percent, plus/minus 2 percentage points from last year's target of 6-8 percent.
      CBA's board also said in its statement that inflation expectations among businesses in the trade sector had declined while they rose slightly in the services, non-oil refining and construction sectors. Inflation expectations among households were at a minimal level.
      Azerbaijan's economy, which remains heavily dependent on oil, continued to expand in the fourth quarter of last year, with growth at the end of the year of 1.4 percent, CBA said, including 1.8 percent growth in the non-oil sector.
      The central bank's own survey of business confidence showed an improvement in all sectors, with household consumer confidence also in a positive zone.
      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.


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