BAKU, Azerbaijan, July 21. Russian Gazprombank forecasted the extension of the pause in raising the discount rate and its maintenance at the nine percent level by the Central Bank of Azerbaijan (CBA) at the upcoming board meeting on July 26, Deputy Head of Research and Chief CIS Economist at Gazprombank Gulnara Khaidarshina told Trend.
According to her, the arguments in favor of this decision are: a steady slowdown in inflation, which at the same time exceeds the refinancing rate; a stable level of dollarization of household deposits; a weakening of the external inflationary background; as well as the need to create additional conditions for growth in the non-oil and gas sector.
"Following the previous meeting, the CBA announced that the decision to suspend the rate growth cycle was made taking into account the updated macroeconomic forecasts and factors affecting inflation," she reminded. "The CBA stressed that the measures taken earlier to raise the rate and other parameters of the interest rate corridor, the adequate use of monetary policy instruments in the new configuration, the increase in the required reserves, and changes in macro-prudential requirements limit inflationary pressure in the economy."
Besides, according to Khaidarshina, taking into account the fact that the trend of decelerating inflation has become stable, the bank expects an extension of the pause in tightening monetary conditions next week.
The expert further spoke about the arguments for the above decision.
"Inflation in Azerbaijan in June again slowed down to 10.6 percent year on year and lost 0.9 percentage points compared to May. The slowdown was again observed in all segments—food, non-food, and services," she explained. "The inflation remains outside the CBA's target corridor (four percent +/- two percentage points) and exceeds its upper limit by 460 base points, and the refinancing rate by 160 base points. We expect that in July-August inflation will slow down to levels close to the levels."
Food inflation in Azerbaijan slowed down to 11.5 percent year on year in June this year, having lost 1.2 percentage points compared to the previous month, Khaidarshina said.
"A slowdown in price growth is recorded for meat, buckwheat, flour, fish, eggs, oil and fat, and fruits and vegetables. At the same time, prices for sugar and soft drinks continue to accelerate," the expert also explained. "Inflation in the non-food segment continued to slow down in June and amounted to 10.3 percent year on year, losing 0.4 percentage points compared to May. This was facilitated by a slowdown in prices for sawn timber, paper, and flatbeds. However, prices for bicycles and detergents continue to accelerate. This is probably due to the increased demand for certain groups of goods in the summer."
She also said that the growth of tariffs for services slowed down by 0.7 percentage points to 9.8 percent year on year due to slower growth in prices for a rest abroad.
Meanwhile, according to her, the rise in the cost of urban transport and taxi services had a restraining effect on the slowdown in growth.
"Dollarization of household deposits remains stable. The dollarization of household deposits is declining more smoothly compared to the share of foreign currency loans in the total portfolio of banks," Khaidarshina pointed out. "According to the CBA, in May the share of household deposits in foreign currency fell to 38 percent from 39.2 percent at the end of last year and remained near the lows since the start of the COVID-19 pandemic."
She noted that the current monetary conditions allow for ensuring that the dollarization of deposits remains below 40 percent, while a serious increase in the dollarization of deposits is one of the factors of potential pressure on the sovereign ratings of Azerbaijan, as designated by the leading rating agencies.
"The external inflationary background continues to weaken. Leading exporters to Azerbaijan—Russia, Türkiye, and China—accounted for a total of 48 percent of imports from January through May 2023," the expert further explained. "Inflation in Russia in June, despite a slight acceleration, remained low and amounted to 3.3 percent year on year. The growth of consumer prices in Türkiye in June continued to slow down and reached 38.2 percent year on year, losing 1.4 percentage points compared to May."
In addition, according to her, inflation in China slowed to zero in June amid a slower than expected recovery in domestic demand.
She also reminded us of the slowdown in inflation in the US and the Eurozone in parallel with the emergence of the risks of a slowdown in the global economy.
Thus, the risks of an increase in the cost of imports for Azerbaijan in the short term are weakening, Khaidarshina explained.
"Growth in the non-oil and gas sector is normalizing; additional conditions may be required for its further recovery. In the first half of this year, non-oil and gas GDP growth slowed to 3.1 percent on annual basis from 9.6 percent a year earlier," the expert noted. "At the same time, domestic demand is expanding moderately, as evidenced by the acceleration of retail trade turnover growth to three percent year on year from 2.9 percent. A pause in monetary policy tightening will create additional conditions for a further recovery in domestic demand. The main stimulating function in the economy is performed by the budget."
"Given the above factors, the CBA at the upcoming meeting on July 26 may keep the rate at nine percent. Such an approach will help to consolidate the disinflationary trend and avoid excessive pressure on economic growth," she concluded.
On June 21, the Central Bank of Azerbaijan decided to leave the discount rate unchanged at nine percent. The upper and lower limits of the percentage corridor also remained unchanged at 10 percent and 7.5 percent, respectively.
