BAKU, Azerbaijan, January 12. The average interest rate for one-day unsecured operations in the money market, the policy rate’s operational target through the Azerbaijani Interbank Rate (AZIR), has begun to influence other market rates, Elchin Gulaliyev, Deputy Director of the Central Bank of Azerbaijan's (CBA) Monetary Policy Department, told Trend.
He noted that the Central Bank will continue refining its operational framework to enhance the transmission of the policy rate to the financial sector in 2026, emphasizing efforts to strengthen the impact of the policy rate on market interest rates, maintain price stability, and manage liquidity in the banking system efficiently.
Gulaliyev began by noting that at the end of last year, the gap between the discount rate and the AZIR, the auxiliary operational target of monetary policy, which represents the average interest rate for 1-day transactions in the unsecured money market, had been significantly reduced. He emphasized that the Central Bank will continue refining its operational framework in 2026 to further strengthen the influence of the discount rate on interest rates across the financial sector.
"The AZIR on 1-day unsecured interbank transactions was managed very close to the discount rate in 2025. This alignment reflects improvements in the operational framework, along with the active use of open market operations and the 7-day deposit instrument. The data confirms this success: the standard deviation between the discount rate and AZIR was just 0.28 percentage points, and in the last three months, it dropped sevenfold to 0.04 percentage points. Another key development is that during this period, the discount rate began influencing other interest rates through AZIR. For instance, the reduction of the discount rate by 25 basis points in July 2025 not only affected the returns on securities but also led to lower deposit and loan rates," he explained.
Looking ahead, Gulaliyev said that the Bank will continue enhancing its operational framework in 2026 to reinforce the discount rate’s transmission across the financial sector. All available tools will be employed to manage AZIR close to the discount rate, with careful attention to the banking system’s liquidity position.
He also highlighted the Bank’s inflation targets, noting that while the Central Bank plans to keep inflation within a 4±2% range in 2026, the October 2025 forecasts projected annual inflation at 5.7%. Gulaliyev stressed that in a climate of rising external risks, the Bank will rely on key monetary policy instruments to maintain inflation within the target range.
"Keeping inflation within the target range is a key condition for achieving long-term sustainable economic growth. In making monetary policy decisions in 2026, the Central Bank will carefully evaluate both internal and external factors that could influence inflation, along with associated risks. We expect the inflation forecast under the base scenario to materialize, with inflation remaining within the target range. The Central Bank updates its inflation forecasts every quarter based on a thorough analysis of these factors. Building on this approach, in 2026, the Central Bank will also provide macroeconomic forecasts under alternative scenarios, allowing it to assess potential inflation risks and respond flexibly if needed. The Bank will use all tools at its disposal to achieve its monetary policy objectives," Gulaliyev said.
The CBA official also outlined how the Central Bank plans to maintain exchange rate stability amid global trade uncertainties and import-driven inflation pressures.
"In 2025, the foreign exchange market remained stable, with supply and demand prevailing across both cash and non-cash segments. Under these conditions, the Central Bank's foreign exchange reserves rose by 4.3%, reaching $11.4 billion.
Forecasts indicate that the current account surplus of the balance of payments in 2026 will support stability in the foreign exchange market. Under the base scenario, the current account surplus is expected to reach $3 billion, equivalent to 3.7% of GDP.
As is standard practice, the Central Bank conducts auctions for the sale of foreign exchange funds from the State Oil Fund for fiscal purposes. At the same time, it reserves the right to intervene in the foreign exchange market if temporary supply-demand imbalances arise. Any such operations will be communicated to the public, as in previous periods," he added.
Flexible management of liquidity in the banking system through open market operations and other instruments remains a cornerstone of the Central Bank's monetary policy. Gulaliyev highlighted the key indicators that guide the Bank in assessing liquidity positions amid the current global financial environment and explained how the steps taken in this context support both inflation control and financial stability. He emphasized that the Central Bank applies its monetary policy tools by carefully monitoring money market dynamics and the liquidity position of banks:
"As is well known, a bank’s liquidity is influenced by both autonomous factors, which operate independently of the CBA, and non-autonomous factors, which are linked to the CBA. Autonomous factors primarily include changes in government accounts.
The Central Bank's toolkit includes instruments for both liquidity sterilization and liquidity provision. Sterilization instruments include overnight standing facility deposits, CBA notes, and 7-day open market deposit operations, while liquidity provision instruments consist of overnight standing facility reverse repos and 7-day open market reverse repos. By using these tools, the Central Bank ensures that short-term interbank interest rates, particularly AZIR, respond effectively to changes in its interest rate corridor.
At present, the banking sector has short-term excess liquidity, which is mainly managed through 7-day deposit operations as part of open market activities.
The Central Bank is also focusing on strengthening the interest rate channel in the transmission of monetary policy. Special attention will continue to be given to this area in the coming period," he added.
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