MONETARY EASING

The Central Bank of Azerbaijan (CBA) has announced a change to the discount rate, which will be reduced by 0.25 percentage points to 7%. At the same time, the boundaries of the interest rate corridor were also reduced. The new boundaries are 6% and 8%.

Following the interest rate change in May 2024, there has been some interest in the reasons for the decision, despite the small fluctuations. This is particularly relevant given that the Central Bank has also made adjustments to its macroeconomic forecasts.

The CBA is not the only regulatory body in the region to have revised the rate. On 24 July, the Central Bank of Türkiye reduced the key rate by 300 basis points (to 43%), in the context of stabilising inflation.

The Bank of Russia also reduced the rate from 20 to 18%, arguing that inflation expectations have fallen. Nevertheless, the regulatory authority continues to draw attention to the ongoing risks, which include a slowdown in the global economy, high inflation and geopolitical instability. The Bank of Russia has also revised its oil price forecast, predicting $55 per barrel in 2025-2026.

The CBA's decision to lower the discount rate after a long period of stability indicates a shift to a softer but cautious monetary policy. In contrast to Türkiye and Russia, Azerbaijan has a more stable macroeconomic position, which allows for easing without the risk of destabilising inflation or the exchange rate.

Within the target corridor

The primary rationale for considering this easing was the observation that current inflation is aligned with the forecast trajectory: as of the end of June 2025, annual inflation stood at 6%, remaining within the target range (4±2%). Core inflation is 4.8 per cent, indicating restrained pressure on prices in the medium term.

Price growth by commodity category was distributed as follows:

The following categories comprise the majority of expenditure: food products, alcohol and tobacco (7%), paid services (7.2%), and non-food products (2.8%).

At the same time, external pro-inflationary factors have not intensified. According to the IMF, the global commodity price index fell by 0.6 per cent year-on-year in June, while the food index fell by 4.2 per cent.

The CBA also observed that there have been no significant changes in the balance of inflation risks recently. Meanwhile, imported inflation and exchange rate dynamics in trading partner countries remain the main external factors. CBA Chairman Taleh Kazimov noted at the press conference that the rise in prices in countries that are Azerbaijan's trading partners has led to a 3.36 percentage point increase in domestic prices this year. "With regard to domestic factors, the strengthening of the nominal effective exchange rate of the manat contributed to a 0.52 percentage point decrease in inflation, an increase of 1.61 percentage points in state and household consumption, and an increase of 4.6 percentage points in prices for agricultural products," he noted.

The CBA has made minor adjustments to its annual inflation forecasts: to 5.7 per cent in 2025 and 5.3 per cent in 2026 (in April, the forecasts were 5.3 and 4.3 per cent, respectively).

Nevertheless, the CBA has stated that, in accordance with the baseline scenario, annual inflation will remain within the target level.

The stability of the exchange rate and the reduction of external pressure are creating conditions that allow for the continuation of the soft monetary policy cycle.

Currency position

The Central Bank also considers it a positive factor that the supply of currency in the domestic market in 2025 continues to exceed demand, including both cash and non-cash segments. This is an indication of strengthening confidence in the national currency. In addition, there has been a decline in the dollarisation of individuals' deposits, which also reflects positive expectations.

The balance of foreign trade at the end of the first half of the year totalled $1.4 billion, and the CBA maintained its forecast for a current account surplus for the 2025-2026 financial year. The country's foreign exchange reserves reached $77.7 billion, representing a 9.4% increase compared to the beginning of the year. This volume is sufficient to cover imports for a period of three years.

In the money market, the average daily AZIR index (the rate on the interbank unsecured money market) stood at 7.03 per cent in June and rose to 7.15 per cent in July, confirming the activity of the banking sector. The volume of transactions in the unsecured market increased by 26% compared to the first half of last year, while the number of transactions increased by 55%. In order to bring the AZIR index closer to the discount rate, the CBA actively used weekly operations to sterilise excess liquidity.

At the same time, the CBA anticipates a further strengthening of the nominal effective exchange rate of the manat next year and is adopting a cautious approach to fluctuations in the exchange rate segment.

The exchange rate between the euro and the dollar is currently being traded on the world currency markets.

"Despite the stability of the manat exchange rate, the dollar-euro ratio is changing. If we examine the 20-year trend, it becomes evident that a short-term return to the average level is a possibility. However, this does not imply that other currencies lose value against the euro or the dollar. It is incorrect to assume that the dollar will depreciate in perpetuity. The influence of the spot dollar index on the nominal effective exchange rate of the manat is negligible," said Central Bank Director General Vugar Ahmadov.

Forecast adjustments

Current projections indicate that the average oil price in 2025 is expected to be around $68.6 per barrel, a decrease from the previously anticipated figure of over $70. Similarly, gas prices are forecast to be around $299 per cubic metre. It is forecast that in 2026, the prices will be $64.6/bbl and $290/tcm, respectively. It should be noted that the 2025 state budget of Azerbaijan sets the oil price at $70 per barrel.

Kazimov emphasised that the CBA anticipates a current account surplus of $3.6-4 billion in 2025 and $3.5 billion the following year.

In light of these developments, the forecasts for economic growth have been revised marginally: The GDP is projected to increase by 3% in 2025, with a 4.2% growth predicted for the non-oil and gas sector (it should be noted that in April, these figures were higher at 3.3% and 4.7%, respectively).

Simultaneously, the Ministry of Finance has announced that, according to the mid-term budget plan for 2025-2029, Azerbaijan's GDP growth is expected to reach 3.7% this year, which is an increase from the previously forecasted 3.5%. The forecast for the oil and gas sector was raised from 0.5% to 1.2%, while the forecast for the non-oil and gas sector remained at 4.9%.

Experts observe that such fluctuations are a natural consequence of the constant external challenges faced by the business world, including geopolitical instability and trade wars.

It is vital to note that the country's primary stabilising asset, strategic foreign exchange reserves, is expanding and has already reached $77.7 billion, which is 9.4% more than at the start of the year. "Our strategic currency reserves are sufficient to finance imports for a period of three years, which is an exceptionally high indicator," Kazimov stated.

Azerbaijan has a strong enough stabilising buffer to enable it to react flexibly to the sharpest external and internal shocks in the short term.