Azerbaijan’s Central Bank cuts key rate Inflation on a leash

On February 5, the Board of the Central Bank of Azerbaijan (CBA) made its first monetary policy decision of the year by lowering the refinancing rate. The key rate was reduced to 6.5%, while all parameters of the interest rate corridor were cut by 0.25 percentage points. In reaching this decision, the regulator primarily considered the alignment of actual and projected inflation with the target range of 4 ± 2%, as well as the decline in global inflation expectations among many countries, including Azerbaijan’s main trading partners.

This move mirrors actions being taken by several central banks worldwide, aimed at easing monetary conditions to stimulate GDP growth, reduce the financial burden on the real sector, and expand incentives for businesses.

A recurring theme in many speeches at the annual World Economic Forum (WEF) in Davos in January was the issue of geo-economic confrontation amid global tariff tensions. These negative factors are significantly affecting global trade, investment, supply chains, and access to natural resources. The tariff wars that intensified last year could, if the worst-case scenarios materialise in 2026, escalate into a full-scale economic confrontation — involving port blockades, export restrictions on key goods, contract terminations, capital flow controls, pressure on the energy sector, and more.

Even if the most catastrophic of these risks can be avoided, the development of the global economy in 2026 will still be under pressure from long-term inertial processes. According to estimates released by the International Monetary Fund (IMF) in January, global economic growth in 2026 is expected to increase by no more than 0.3 percentage points, reaching 3.3%. Nevertheless, this pace would remain below the IMF’s long-term average target of 3.7% GDP growth, which is close to pre-crisis levels. However, the IMF’s outlook appears relatively optimistic compared to the far more pessimistic forecasts of the World Bank (WB) and the European Bank for Reconstruction and Development (EBRD). The World Bank, for instance, predicts a contraction in both external trade and domestic demand, expecting global GDP growth to fall to 2.6%, while EBRD experts anticipate that economic growth in the Eurasian region will average no more than 2.3%.

Amid growing expectations of a global economic slowdown, regulators in leading economies are moving to ease monetary policy. By lowering key interest rates, they seek to stimulate economic capitalisation, accelerate the functioning of financial markets, and provide a boost to entrepreneurial activity.

Notably, both global issuing centres and local central banks, through adjustments to the key rate, determine the interest rates at which they lend to commercial banks and accept deposits from them. These changes also influence a range of other rates, including those on commercial loans and deposits, as well as penalties and various financial operations.

Beyond monetary regulation, a central function of the key rate is to manage consumer inflation. During periods of price stability—or to revive the economy after a slowdown—the rate is lowered to encourage the flow of financing into the economy. Conversely, in times of financial “overheating” and rising consumer prices, the rate is raised, acting as a “brake” on banks and other sources of funding for production, trade, and investment.

A similar approach is being followed in Azerbaijan, where the Central Bank implemented a series of key rate reductions in 2024–2025. Most recently, in December 2025, the rate was lowered by 0.25 percentage points to 6.75%. On February 4, 2026, the regulator further reduced the refinancing rate to 6.5%, setting the lower bound of the interest rate corridor at 5.5% and the upper bound at 7.5%.

This move signals that the CBA currently does not perceive significant risks that would prevent the easing of monetary policy in Azerbaijan. “When deciding on the interest rate corridor, the Central Bank took into account the alignment of actual and projected inflation with the target range of 4 ± 2%, global economic activity, the current situation in international financial markets, key trends in the domestic macroeconomic environment, as well as the impact of monetary policy decisions on financial markets and the real sector,” the CBA said in a statement released on February 4.

In evaluating key macroeconomic indicators, the regulator noted that annual inflation currently remains within the target range, with a trend toward slower growth observed over the past two months. In December 2025, 12‑month inflation stood at 5.2%, driven by year-on-year increases in food products, alcoholic beverages, and tobacco (6.4%), paid services (5.7%), and non-food goods (2.5%). Meanwhile, annual core inflation was 4.8%, reflecting the closeness of the stable component of inflation to the target level.

Stability in the foreign exchange market continues to play a critical role in maintaining price stability. In particular, a reduction in the dollarisation of deposits of resident individuals by 2.6 percentage points—to 28%—signals positive expectations regarding the national currency. At the same time, the CBA’s foreign currency reserves grew by 5.1% in 2025, reaching $11.5 billion, significantly enhancing the regulator’s capacity to sterilise the money supply—a crucial tool in the event of shocks to the foreign exchange market.

External sector indicators also remain favourable. Excluding gold imports, the positive trade balance exceeded $6.9 billion, and according to the regulator’s updated macroeconomic forecasts, the current account is expected to remain in surplus through 2026 and 2027.

Nevertheless, while liberalising monetary policy, the CBA is fully aware of the potential risks that could negatively affect macroeconomic stability in the country. These include global geopolitical tensions, trends toward economic fragmentation, and instability in the external trade environment, which continue to maintain a high level of uncertainty in commodity and financial markets. 

The main external risk is linked to the transmission of import prices to domestic inflation; the impact of imported inflation largely depends on price dynamics among Azerbaijan’s key trading partners. High volatility in global energy prices and fluctuations in the nominal effective exchange rate should also be taken into account. However, due to declining inflation expectations in several of Azerbaijan’s trading partners, overall price growth risks have been partially mitigated. The main domestic factors driving inflation, according to the CBA, are rising local cost pressures and government spending, which in 2026 may be higher than previously expected.

The Central Bank will continue to use all available instruments to ensure price stability in the country, and further adjustments to the interest rate corridor will be made based on projected and actual inflation, as well as the results of macroeconomic analysis. The next decision regarding the parameters of the interest rate corridor is scheduled for April 2 this year.