Friday, March 15, 2019

Azerbaijan cuts rate 6th time, inflation now seen in range

     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.
      But CBA said inflation in February ticked up to 2.1 percent for average inflation in the first two months of 1.9 percent, still close to the lower level of CBA's target range.
      CBA said inflation expectations had been stable but the most recent inflation outlook suggests structural changes in the balance of risks, with inflation expectations now anchored at a low level due to a stable exchange rate, anti-inflationary monetary conditions and a balance of payments surplus.
     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:

"The Management Board of the Central Bank of the Republic of Azerbaijan decided to reduce the refinancing rate to 9% from 9.25%. The ceiling of the interest rate corridor was set at 11%, and the floor at 7% (±2% symmetric range). The decision is taking effect on 15 March 2019.

Since the last meeting of the Board dedicated to the monetary policy annual inflation has followed the expected trend remaining below the target range.

The key priority of the Central Bank policy is to ensure that inflation is maintained within the target amid higher economic activity. Albeit significant soothing since early 2018 positive zoning of real interest rates allows to neutralize internal and external risks. Under the updated outlook inflation will settle within the target (4±2%) in 2019.

Inflation. In January – February of the current year (February vs previous year December) inflation was 0.8%. Total price level increased by 2.1% on food and 0.2% on non-food products, while prices for services decreased by 0.6%. Food prices were driven by seasonal factors. In January – February prices for 15% of products included to the consumer basket remained unchanged, and prices for 16% of products declined. Price hike for 85% of products that rose in price was below 2%.

In February 2019 12-month inflation was 2.1%, close to the bottom of the current band. Average annual inflation stood at 1.9% in January – February (y/y (4.7%) down by 2.8 p.p.).

Inflation expectations. Since the last monetary policy meeting of the Board inflation expectations of businesses have undergone no significant changes. According to the real sector monitoring by the Central Bank over recent 2 months, price expectations have declined in trade, non-oil processing and construction, and increased in services. No rise was witnessed in the share of respondents among households who expect high inflation.

External condition. External environment remains favorable. According to initial data, in January – February external trade surplus amounted to $986.3 M – export increased by 42.6%, including 16.4% rise in non-oil export. 

Commodity prices in global markets have been prone to rising over recent months. In January - February 2019 oil prices made up $62 on average, having increased by 26% ($14) since early year. According to the UN Food and Agriculture Organization, while global food prices increased by 3.4% in January – February, they are y/y below by 2.2%.

Average inflation in trade partners has remained stable over recent months, no sharp fluctuations were witnessed in their currency exchange rates.

Strategic foreign exchange reserves have increased by 4.1% since early year to $46.6 B, attributable to balance of payments surplus.

Economic activity. The economic growth rate continues to rise at the beginning of 2019. In January 2019 economic growth rate y/y was 2.9%. Non-oil economic growth was 2.7%, driven by trade. The non-oil industry grew by 12.9%, agriculture by 2.4%.

The business confidence index based upon real sector monitoring by the Central Bank has increased in non-oil processing and trade, and decreased in construction and services over recent 2 months.

Widening domestic demand is expected to have a downward effect on output gap over the remaining period of the year.

Inflation risks. Developments of the past period of the current year and updated outlook suggest that the risk balance of inflation is undergoing certain structural changes.

Stabilizing factors include the sustained exchange rate, anti-inflationary monetary condition, and low inflation expectations, anchoring on a low level, on the backdrop of the balance of payments surplus.

External and internal factors of inflation are also kept in mind. External factors mainly include volatile oil prices related to high supply probability in global oil markets amid slowdown in global economic growth. On the other hand, ongoing price hike trend in global commodity markets increases the risk of inflation import. Uncertainties related to changes in inflation and exchange rates in trade partners are still on air. Domestic factors mainly include direct and indirect effect of fiscal stimuli and financial sector related decisions on the consumer market and the monetary sector.

Monetary condition. Recent successive decisions on monetary policy easing contributed to the normalization of the monetary condition. Shaping of the monetary condition by the Central Bank serves to maintaining an optimum balance between the inflation target and output gap.

No significant change has occurred in money base in manat since the last Board meeting on the monetary policy, money base in manat reacted to changes in the balance of government accounts.

National currency denominated savings are still attractive aided by decreasing behavior of dollarization in the environment of positive zoning of real interest rates and extension of full deposit insurance. 

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.

Next disclosure by the Management Board of the Central Bank on the interest rate corridor parameters will go public on 26 April 2019."


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