Our Analytics 3 february — 12:35

Elman Rustamov emerged from the shadows and corrected the numbers (Our afterword)

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BY MAMMAD EFENDIYEV, ECONOMY SECTION

We have already reported that the board of the Central Bank of Azerbaijan (CBA) has decided to reduce the discount rate by 0.25 percentage points from 7.5% to 7.25%. At the same time, the lower threshold of the interest rate band was reduced from 5.75% to 5.5%, and the upper from 9.25% to 9% (± 1.75% symmetric range). This decision entered into force on 31 January. Once again, the Central Bank will consider the issue of changing the parameters of the interest rate band on 19 March.

Honestly, recently the Central Bank has so often lowered its interest rate that you involuntarily think about why this is happening. Indeed, over the past two years, this is the thirteenth decrease: an average of more than one operation every two months. And the rate as a whole has been reduced from 15% to the current 7.25%, more than twice. It would seem that nothing prevented the country's main bank from lowering this frequency by increasing the scale of the reduction rate. This would require less trouble for the Central Bank itself and for the entire banking system of the country. However…

The Central Bank is too conservative and its head Elman Rustamov is too cautious. As can be understood from his statements, only once every two months the board of the Central Bank considers the issue of the discount rate when discussing its monetary policy as a whole. And, believe me, not every time a decision is made about the need to reduce the rate. This becomes possible only after heated discussions, a comprehensive weighing of the entire economic situation in the country.

Basically, of course, such decisions on the parameters of the interest rate band have always been made and will continue to be made depending on the actual and forecast inflation rate, as well as on the implementation of risk scenarios. And the situation with inflationary expectations in the country has been softening for several months. At the end of the past the beginning of this year, inflation risks slightly decreased, which allows us to continue the normalisation of monetary policy. At the same time, taking into account a number of internal and external inflationary factors and risks, the Central Bank prefers to maintain the anti-inflationary nature of monetary policy. All this forces the chief banker to lower the rate, in order to improve the economy, but very carefully, as to avoid a surge in inflation.

And the situation was as follows. After the last meeting of the Central Bank's board on monetary policy at the end of last year, inflation did not go beyond the forecast limits and remained below the average value of the target range, forecasts for which were 2%-4%. A surplus current account balance, a stable exchange rate, adequate monetary conditions, and low inflation expectations had a stabilising effect on prices. Of course, there are risks, both internal and external.

At one time Elman Rustamov's arguments remained in the shadows

Internal risk factors include an increase in the money supply as a result of increased budget spending and inflationary expansion of consumer loans. But the main banker is ready for these risks, moreover, he even believes that it is necessary to further increase social spending from the state budget. Therefore, the risks for the medium term are mainly associated with external factors, in particular with a decrease in the growth rate of the global economy. Of particular danger to Azerbaijan is the possible impact of this factor on oil prices. Yes, although today we can say that we have already left the oil needle, but the dependence of the country's economy on the hydrocarbon factor is still great.

And such a danger has been growing recently in connection with the threat of a new coronavirus. As a result of its spreading in China, which is the largest importer of oil, prices for black gold are plummeting: in less than a month from 71 to 55 dollars per barrel (more than 22%). But the government, as the chief banker emphasised, carried out serious work in the direction of confronting external challenges. So, the country's budget is calculated on the basis of oil prices at the level of $55 per barrel, which is a fairly rational approach that minimises external risks and practically guarantees an annual surplus from price differences.

But even with any other outcome, the country's strong strategic currency base is ready to successfully confront the most serious external challenges. And there is every reason to say this: the strategic currency reserves of Azerbaijan since the beginning of the year have grown by almost 2% and already exceed $52 billion. True, some may recall that on the eve of the devaluation of the manat in 2015, the country's multi-billion dollar strategic currency reserves also inspired hope to avoid a sharp depreciation of the national currency. The reserves of the Central Bank alone amounted to $14 billion, but they quickly began to melt. But even then, the chief banker, as he openly admitted on the eve of this terrible day for the country's population, stubbornly resisted such a turn of events. Unfortunately, his arguments remained in the shadows of more cautious members of the government. Now the times are different: most of the old government is gone, and the remaining ones themselves have realised their terrible mistake.

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