Azerbaijan's central bank widens rate corridor, holds refinancing rate at 6.5%

The Central Bank of the Republic of Azerbaijan kept its refinancing rate at 6.5 per cent and the ceiling of its interest rate corridor at 7.5 per cent on 23 September, but cut the floor by 0.5 percentage points to 5 per cent, according to its press release. The decision took effect on 24 September. The bank said the lower floor is meant to promote activity in the interbank money market amid excess liquidity in the banking sector, and that a wider corridor is expected to encourage interbank transactions by reducing its own participation in the money market. Keeping the ceiling and the refinancing rate unchanged is intended to support the stabilisation of inflation expectations, it said.

Inflation inside the target band

Twelve-month inflation was 5.7 per cent in August, 0.1 percentage points lower than in July, and core inflation was 5.1 per cent, the bank said. Prices rose 7.2 per cent for food, alcoholic beverages and tobacco, 5.0 per cent for paid services and 3.7 per cent for non-food goods. The bank's target range is 4 per cent plus or minus 2 percentage points, according to its February decision, and it left unchanged its forecast that inflation will stay within the band over the medium term. Against August inflation, the 6.5 per cent refinancing rate is a real rate of 0.8 percentage points, a Data Desk calculation.

The September decision followed two holds. On 24 June and 31 July the board left all corridor parameters unchanged. In July it said an upward revision to its inflation forecast supported a tighter stance while a significant excess of foreign exchange supply over demand supported a more accommodative one. Before that, it had cut all parameters by 0.25 percentage points on 4 February, which set the refinancing rate at 6.5 per cent.

Foreign currency surplus and excess liquidity

The bank said supply significantly exceeded demand in both the cash and cashless foreign exchange segments this year. Over eight months, cash foreign currency purchases by exchange offices exceeded sales by $673 million, and dollarisation of resident individuals' deposits fell 3.7 percentage points to 25.8 per cent in July from a year earlier, according to the release. The central bank absorbed the surplus, and its foreign exchange reserves rose 32.9 per cent over the eight months to $15.3 billion, which it said is the historic maximum level.

The bank cited State Customs Committee data showing a trade surplus of $10.4 billion in January to August, and preliminary figures showing a remittances surplus of $751 million, up 74.1 per cent on a year earlier. It said it may revise upward its forecast for the 2026 current account surplus, citing higher global energy prices and non-hydrocarbon exports.

Excluding required reserves, the banking sector's structural liquidity surplus reached AZN6.3 billion at the end of August, 2.2 times the December level, the bank said. The average daily AZIR rate in the unsecured money market was 6.39 per cent in July, 6.28 per cent in August and 6.02 per cent over the part of September before the decision. That is 48 basis points below the refinancing rate and 102 basis points above the new floor, a Data Desk calculation. Seven-day deposit operations made up 70.8 per cent of the sterilisation portfolio at the end of August, and the central bank's note portfolio had more than quadrupled since the end of 2025.

Risks and the next decision

The bank said the balance of risks to the inflation outlook had not changed significantly since the previous meeting. It cited global geopolitical uncertainty and the risk of higher energy and food prices being passed through from major trading partners, with the extent depending on the manat's nominal effective exchange rate, and said domestic demand is not expected to add to inflationary pressure under current fiscal and monetary conditions, according to the release.

The bank revised its schedule, bringing the next corridor decision and press conference forward from 4 November to 29 October, with a meeting with experts on the same day. ING expects the bank to keep its policy rate at 6.5 per cent, with inflation inside the target range, according to a report by AzerNews on 15 October on an ING review of the region.