Curbing inflation, Azerbaijan's Central Bank expects macroeconomic stability in 2024 Review by Caliber.Az

Foreign economic risks of the last two years, mainly related to the factor of imported inflation, are gradually decreasing. In turn, chances for easing regulators' monetary policy grow, and as a consequence, improving the GDP dynamics of the nations around the globe. In particular, the International Monetary Fund (IMF) expects global inflation to drop from almost 9 per cent last year to 4.8 per cent in 2024.

These positive trends are also tangible in Azerbaijan, where despite the high volatility of prices in commodity markets, the government forecasts a significant decline in inflation expectations. The recent decision of the Central Bank of Azerbaijan to reduce the discount rate is also an obvious signal for the country's financial sector, which means that it is confident that inflation will remain close to the target range.

The ongoing reshaping of the global economy since the COVID-19 pandemic has had an extremely negative impact on the stability of traditional financial mechanisms. Risky attempts of the US and European central banks to overcome the pandemic economic downturn by rotating a "printing press" have turned into an energy and raw materials crisis and rising global inflation. Attempts to suppress price growth by tightening monetary policy (raising interest rates) led to a decline in the rate of capitalisation of the global economy and the subsequent recession in 2023.

One way or another, the unprecedented efforts of regulators to curb price growth, albeit slowly, are helping to keep back this negative trend: for example, consumer prices in the European Union, which increased by only 2.9 per cent year-on-year in October, are at their lowest rate since July 2021. Although the European Central Bank (ECB) target of 2 per cent has not yet been met, the current inflation rate is markedly lower than in October 2022, when it reached 10.6 per cent.

Similar processes appear in North America: as noted the other day by Philip Jefferson, deputy chairman of the US Federal Reserve (Fed), in the process of combating price increases unprecedented in the last 40 years, the Fed has raised the key rate by 5.25 per cent over the past year and a half, thanks to which inflation has been able to slow down to about 3.4 per cent.

"Overall global inflation is slowing, but core inflation remains above target, so we will have to prepare for regulators' interest rates to remain high in 2024 and likely persist through 2025," IMF Managing Director Kristalina Georgieva said recently.

"Risks to financial authorities are still high and they need to rebuild reserve buffers against future shocks while paying for higher interest rates in servicing debt, supporting the vulnerable, and financing green and digital transformation," she added.

Nevertheless, the IMF director believes that US GDP growth in the third quarter exceeded expectations: the economy has slowed slightly, inflation is falling and the labour market is still very strong. "We raised our forecasts for China last week, which reinforces the positive growth momentum in Asia. And what is good for these two big drivers of the world economy - the US and China - is good for the rest of the world," the IMF chief emphasised.

Amid the global crisis processes, the Ministry of Finance and the Central Bank of Azerbaijan (CBA) have also significantly strengthened control over the financial market over the past two years. Credit conditions and prudential norms in the banking sector are strictly controlled, and the adjustment of monetary policy (raising the discount rate to 9 per cent) has helped to reduce inflation this year.

Moreover, over the past eight years, the CBA has managed to avoid the main scourge of modern times - monetary inflation. Unlike neighbouring Russia, Iran, Türkiye, Georgia and many other countries of the Eurasian region, Azerbaijan's national currency, the manat, retains an enviable exchange rate stability.

Undoubtedly, high energy prices last year contributed to the stability of the manat in the recent period, and despite price volatility in 2023, oil and gas prices have not fallen below critical for our country. Despite the sharp swings in oil prices in November, Brent crude oil will stand at $80 a barrel on average well into 2024, according to analysts at the US-based Goldman Sachs Group.

"OPEC+ countries will seek to ensure the oil price in the range of $80-85 per barrel, taking into account production cuts in October 2022, as well as April and June this year. At the same time, against the background of high demand, the deficit in the world market in 2024 will be 700 thousand barrels per day (bpd) against 300 thousand bpd in the current year," MarketWatch quotes a team of analysts of Goldman Sachs Group, headed by Daan Struyven.

In conditions of relatively high prices for hydrocarbon raw materials Azerbaijan can count on stable indicators of foreign trade and balance of payments, and these factors are determinants for the preservation of financial and monetary stability in our country. Moreover, in the draft law on the state budget for 2024, the revenue part was calculated based on the average forecast oil price of $60 per barrel, that is, this parameter was not increased, but remained the same as in the current year.

"Based on the macroeconomic indicators presented together with the draft state budget for 2024, it is predicted that next year the country's economy will retain a favourable macroeconomic environment, balance of payments surplus and stable exchange rate of the national currency," believes Vugar Gulmammadov, chairman of the Accounts Chamber of Azerbaijan.

The above factors also explain the Central Bank's recent decision to cut the discount rate from 9 per cent to 8.5 per cent from 2 November. "The reason for the discount rate cut is since, according to the Central Bank's forecasts, inflation will be in the target range over the next medium-term period," said CBA Chairman Taleh Kazimov.

"Softening policy on the currency market is carried out in conditions when supply exceeds demand: according to the CBA plan, by the end of the year, our monetary base will increase to 20 per cent, which creates certain difficulties from a macroeconomic point of view in the future, so we are reducing the parameters of the discount rate to limit possible risks," he added.

It should be noted that according to the Central Bank, at the end of September, inflation in Azerbaijan slowed down to 5.1 per cent (for comparison, its crest values in September 2022 reached 15.6 per cent), and according to the regulator's forecasts the annual inflation rate in 2026 is likely to drop to 3.4 per cent.

In general, according to Azerbaijan's Ministry of Economy, in recent months, prices in the global food market and inflation in key trading partner countries of Azerbaijan have been gradually declining, and these factors are also reflected in inflation forecasts for the next year. In particular, CBA First Deputy Chairman Rashad Orujev estimates that annual inflation in the republic will be 4.3 per cent this year and 5.3 per cent next year.

"Inflation in Azerbaijan was mainly spurred by external factors, and these global processes are currently undergoing tangible changes. Due to this, and also as a result of the reduction of imported inflation, these processes are already stabilising in our country. In turn, the state has taken several steps to mitigate the consequences of rising prices, especially in the social sphere," Finance Minister Samir Sharifov recently said at a joint meeting of the Milli Majlis (Azerbaijani Parliament) committees.