The Board of the Central Bank of the Republic of Azerbaijan has decided to keep the policy rate unchanged at 7.25 percent. While the upper limit of the interest rate corridor has been maintained at 9 percent, the lower limit has been raised to 6.75 percent. Commenting on this decision, Vusal Gasimli, Executive Director of the Center for Analysis of Economic Reforms and Communication, stated that in monetary policy, the exchange rate of the manat is considered the main anchor of macroeconomic and financial stability:

“Monetary policy is based on price stability. According to the Central Bank’s calculations, the inflationary impact of manat depreciation is stronger than the disinflationary effect of its appreciation.

Toward the end of last year, appreciation pressures on the manat were observed, whereas currently pressures in the opposite direction are at play. These include supply and demand dynamics in the foreign exchange market, the impact of low oil prices on the balance of payments, and dollarization trends. At the same time, there are factors that restrain inflation. The FAO Food Price Index (FFPI) declined by 1 percent in February 2020 compared to the previous month. Of the four product groups included in the index, cereals, dairy, meat, and vegetable oils became cheaper, while only sugar prices increased. Reduced demand for non-food products and services also contributes to downward pressure on prices.

Under such conditions, the Central Bank has made a balancing decision by keeping the policy rate unchanged. On the one hand, monetary policy aims to avoid tightening monetary conditions, while on the other hand, it seeks to ensure exchange rate and price stability.

By increasing the lower bound of the interest rate corridor from 5.5 percent to 6.75 percent, participation of commercial banks in the Central Bank’s deposit auctions is being stimulated. This is because the lower bound of the corridor determines the weighted average interest rate on deposit transactions concluded at deposit auctions. As a result, the increase in the lower bound of the corridor will raise the average interest rate on deposit auction transactions by 1.25 percentage points. In short, the manat liquidity attracted by the Central Bank will become more attractive for commercial banks, creating more favorable conditions for the sterilization of manat liquidity. Given the existing dollarization pressure, effective management of manat liquidity currently in circulation is of critical importance.”