TARGET RANGE

For the sixth time in 2025, the Board of the Central Bank of Azerbaijan (CBA) has decided to keep the discount rate unchanged at 7%. The lower boundary of the interest rate corridor remains at 6%, and the upper boundary at 8%.

Out of the seven board meetings held this year, only one resulted in a rate cut. The eighth and final meeting is scheduled for December 10.

At a press conference, CBA Chairman Taleh Kazimov stated that tightening monetary policy is not currently planned—provided inflation remains within the 5–8% range, the current account balance retains a surplus, the currency market stays stable, and government expenditures remain within the projected limits.

Forecasts revised

Annual inflation in 2025 is projected at 6%, and in 2026 at 5.7%. In July, the regulator had forecast 5.7% and 5.3%, respectively. Thus, the bank has revised its estimates upward.

According to Mr. Kazimov, both actual and expected inflation—correlated with the target interval of 4 ± 2%—as well as global and domestic economic trends, macroeconomic dynamics, and the transmission mechanisms of monetary policy to the real sector are all taken into account when determining the discount rate.

"Since the last board meeting, there have been no significant changes in the balance of inflationary risks," the Central Bank head said. "Instability in global trade continues to trigger fluctuations in commodity and financial markets. The impact of import prices, which are the main external source of inflationary risk, largely depends on developments among trading partners and on the dynamics of the nominal effective exchange rate."

During the first nine months of the current year, annual inflation in Azerbaijan stood at 5.7%, while core inflation reached 4.9%. This indicates that inflation remains within the CBA’s target range and, according to the baseline scenario, is expected to stay so through the end of 2025 and 2026.

The upward revision, as Kazimov explained, is mainly linked to supply-side factors.

Among domestic influences, the main driver was the 9.3% rise in agricultural producer prices, which contributed 4.28 percentage points (p.p.) to inflation. The increase, he stressed, was driven by higher prices for annual crops (up 4.6%), perennial crops (up 22.7%), and livestock products (up 9.6%). According to the State Statistics Committee, import prices for fruit seeds and planting materials rose by 61%, animal feed by 27.1%, and mineral and nitrogen fertilisers by 11.8%. These became the primary contributors to the rise in the agricultural producer price index.

Compared to July, the inflation forecast for 2025 was raised by 0.3 p.p., to 6%, mainly due to the revised agricultural producer price index, now projected at 7.9% instead of 6.9%. This will add 0.47 p.p. to overall inflation.

Similarly, the 2026 forecast increased by 0.4 p.p., to 5.7%, again due to higher agricultural producer prices—now expected to rise by 6.9% instead of 4.8%—contributing 0.93 p.p. to inflation.

Overall, in 2025, around 75% of inflation growth will stem from supply-side factors, with demand accounting for the remaining 25%.

The key underlying factors include the agricultural producer price index, inflation among trading partners, household consumption activity, passenger transport tariffs, and the nominal effective exchange rate (NEER).

In 2026, this structure will change only slightly: around 80% of inflationary pressure will originate from supply-side factors. Upward effects will come from inflation among trading partners and rising agricultural producer prices, while the NEER is expected to have a moderating effect.

According to Kazimov, the combined impact of imported inflation and the nominal exchange rate next year will amount to roughly 0.16 p.p.

Exchange rate, foreign trade, and reserves

By the end of 2025, the CBA anticipates a slowdown in NEER appreciation, with the indicator declining by around 2% due to the weakening of the US dollar. In 2026, however, the NEER is projected to strengthen by 7%, driven by a faster depreciation of partner-country currencies.

According to the State Customs Committee, Azerbaijan’s foreign trade surplus for the first nine months of the year reached $1.8 billion. In the first half of the year, the current account surplus amounted to $2.3 billion, or 6.3% of GDP.

Azerbaijan’s strategic foreign exchange reserves increased by 14.7% since the beginning of the year, reaching $81.5 billion, including $11.3 billion held by the Central Bank itself.

"Our strategic foreign exchange reserves allow us to finance imports of goods and services for 37 months—this is an exceptionally high figure," the CBA chairman emphasised. He noted that the total reserves exceed the national currency supply by a factor of 3.7.

For 2025, the Central Bank projects a current account surplus of $3.7 billion (slightly higher than July’s estimate), while the 2026 forecast remains unchanged at $3 billion.

According to updated data, Azerbaijan’s GDP growth in 2025 is expected to reach around 2.2%, including 3.7% in the non-oil and gas sector. For the first nine months, overall growth stood at 1.3%, with the non-oil and gas sector expanding by 2.9%.

Although the forecasts remain positive, they have been revised downward. In July, the bank had expected GDP growth of 3% overall and 4.2% in the non-oil and gas sector. For 2026, expectations are 2% and 4.4%, respectively.

The Central Bank of Azerbaijan forecasts that the average global oil price in 2026 will be around $64–65 per barrel, while 1,000 cubic metres of natural gas will average $288. The July estimate had assumed $64.6 per barrel of oil and $290 per 1,000 cubic metres of gas.

Although many factors affect global energy prices, the CBA maintains that its baseline expectations remain stable and moderate.

The updated forecasts of the Central Bank of Azerbaijan reflect a cautious yet balanced approach to monetary policy management. The CBA remains confident in the stability of the country’s macroeconomic fundamentals—primarily due to a resilient currency market, a surplus in external trade, and record-level reserves.

This stance appears rational amid global economic uncertainty. Commodity market volatility, persistent pressure on food supply chains, and shifting monetary cycles in major economies continue to pose risks.

Under these conditions, maintaining a stable discount rate and a flexible response to inflationary pressures enable Azerbaijan to sustain equilibrium in pursuit of its economic growth objectives.