Azerbaijan’s central bank lowered its benchmark refinancing rate by 200 basis points to 13.0 percent as it begins to unwind four sharp rate hikes two years ago that were aimed at bolstering confidence in its manat currency and stem inflation following the plunge in crude oil prices.
It is the first rate cut by the Central Bank of Azerbaijan (CBA) since it raised it by a total of 12 percentage points between February and September 2016, with the central bank attributing the rate cut to an expected decline in inflation and an improving external balance.
The CBA believes further rate cuts are possible as it gradually transitions to a neutral monetary policy that will have a positive impact on economic activity.
In addition to the cut in the refinancing rate, the central bank lowered the upper limit of its interest rate corridor to 16 percent from 18 percent and the lower limit to 8 percent from 10 percent.
Oil and gas account for about 95 percent of Azerbaijan’s exports and 75 percent of government revenue so the fall in 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.
Higher oil prices, along with economic reforms, helped Azerbaijan’s current account balance swing into a surplus of 5 percent of Gross Domestic Product by end-2017 along with a trade surplus that exceeded US$5 billion as exports jumped 52 percent.
An improved balance of payments not only resulted in an 11 percent rise in currency reserves, but helped stabilize the manat, with the CBA expecting the positive trend to continue this year.
Earlier this month the CBA said its currency reserves had risen by an annal 24.4 percent to US$5.38 billion in January, with reserves in 2017 up by 34.2 percent from 2016.
“The stabilization of the exchange rate of the manat has had a positive impact on the de-dollarization process, financial stability and a reduction of inflation expectations,” the CBA said, adding the real effective exchange rate is down 36 percent since the end of 2014, stimulating the export of non-oil products and import substitution.
Today the manat was trading at 1.7 to the U.S. dollar, largely steady this year but down 8.8 percent since December 2015 when it floated the currency.
Azerbaijan’s inflation rate eased to 12.9 percent in December last year, with the central bank saying average inflation in January was 5.5 percent.
This disinflation trend is forecast to continue, with surveys showing a downward impact on inflation expectations by households and businesses.
Azerbaijan’s economy grew by 0.1 percent in 2017, up from a 3.8 percent contraction in 2016, with the central bank saying the state statistical committee estimated that the non-oil sector grew by 2.7 percent last year and positive growth this year is expected to continue based on increased investments, non-oil exports and higher consumer confidence.
Azerbaijan cuts rate 200 bps, starts unwinding 2016 hikes