Economist predicts no change in Azerbaijan’s key interest rate

The Central Bank of Azerbaijan is preparing to announce its next interest rate decision on June 24, which will be released as a press release tomorrow at 11:00 AM. It is worth noting that although the CBA cut interest rates by 25 basis points during its first meeting of the current year, it has adopted a wait-and-see approach in the subsequent two meetings against the backdrop of regional geopolitical tensions.

Currently, under its interest rate policy, the Central Bank maintains the policy rate at 6.5%, the lower limit of the interest rate corridor (deposit rate) at 5.5%, and the upper limit (lending rate) at 7.5%. As confirmed by the CBA itself, while this is actually a tight monetary policy, it is considered a neutral stance given the current price pressures.

Instead of declining as anticipated, inflation has shown a renewed upward trend in recent months. According to data from the State Statistical Committee, annual inflation rose from 5.5% to 5.6% in May. Although this figure remains within the Central Bank's target band of 2%–6%, the consecutive upward revisions of inflation forecasts in February and May indicate that price pressures have not fully subsided.

According to the CBA's latest base-case scenario from its May forecast, annual inflation is projected to remain within the target range for both the current and next years. Specifically, under the base-case scenario of the May forecasts, annual inflation is expected to reach 5.9% in 2026 and 4.5% in 2027. It is noted that the upward revision of the inflation forecast stems primarily from the activation of external cost factors. These factors include an accelerating growth rate of global food prices, intensifying inflationary pressures among trading partners, and a slowdown in the appreciation rate of the nominal effective exchange rate. A weakening of demand factors compared to the February forecast has partially neutralized the inflationary impact of supply-side factors. Overall, according to the May forecast, a significant portion of inflation is expected to be driven by supply-side factors.

Mechanically, certain points regarding economic activity over the past month remain. GDP remaining at 0.0% in annual terms in May indicates that domestic demand expanded more restrictively compared to previous periods.

On the other hand, external sector indicators have improved significantly in recent months. While foreign trade turnover increased by 10.1% year-on-year during the January–April period, the more notable highlight is the emergence of a $7 billion surplus in the country's trade balance (the primary component of the current account balance). This figure substantially exceeds the $1.4 billion surplus recorded in the first quarter.

The rapid growth of the Central Bank's foreign exchange reserves in recent months has led to an oversupply in the foreign exchange market, prompting buy-side interventions.

Taking the aforementioned into account, AzerNEWS sought the views of economist Natig Jafarli regarding the Central Bank's upcoming interest rate decision tomorrow. The economist said that it is highly likely that the Central Bank will keep the policy rate unchanged.

“Considering the ongoing global inflationary processes, the central bank might not reduce the policy rate this time. However, it is very probable that they will maintain the interest rate corridor,” economist Natig Jafarli noted.

He added that there is a high likelihood that the interest rate corridor will be kept as it is.

“On the other hand, peace talks between Iran and the US could lead to a drop in fuel prices, which has brought some relief globally. If they do decide to cut the policy rate, it could be by 0.25 percentage points. I do not expect a reduction beyond the figure I mentioned,” he opined.