Global inflation & Azerbaijan's plans Forecast by Caliber.Az

The risks of further inflationary growth are still high in the United States, the European Union, other developed countries and neighbouring countries. The processes associated with global price rise are also tangible in Azerbaijan, where on the president’s initiative it is planned to implement a number of measures aimed at strengthening control and minimising subjective factors affecting the dynamics of consumer price growth.

One of the steps in this direction was the resolution of the Cabinet of Ministers "On additional measures to strengthen monitoring of inflation and prices" published recently. In this regard, Azerbaijan’s government creates a working group to analyse and monitor and strengthen interagency coordination in the field of anti-inflation measures.

The increase in monetary emissions in the US and the EU during the pandemic recession turned out to be a violation of the monetary balance, which led to distortions in monetary policy and subsequently resulted in the global energy and food crises. And with the beginning of the Russian-Ukrainian war and tough sanctions confrontation between the collective West and Russia, the factor of imported inflation became dominant in the economies of almost all countries of the world.

Since the second half of 2022, developed countries, including the United States, the European Union, Canada, Sweden, Russia, and recently Türkiye, have been gradually raising interest rates in order to curb the growth of consumer prices. Contrary to the expectations of the G20 countries that recession-induced processes will cool down overheated stock markets in 2023, the global inflation rate in most countries of the world has not significantly decreased, and, to all appearances, the rate of price growth will remain above the targets of central banks for at least another year.

In this regard, it is quite telling that despite the decline in inflation pressures from 7 per cent in April to 6.1 per cent in May, the new EU price growth forecasts were revised upwards from the winter estimates to 5.8 per cent in 2023 and 2.8 per cent in 2024.

The energy crisis, rising prices for raw materials and more complicated logistics of their delivery against the backdrop of the still ongoing war in Ukraine pose high risks for the EU economies. Accordingly, inflation expectations are still quite far from the European Central Bank's (ECB) 2 per cent target.

"As inflation remains high, financing conditions will become even tighter. While the ECB and other EU central banks are expected to be nearing the end of their interest rate hike cycle, the recent turbulence in the financial sector is likely to increase pressure on the cost and ease of access to credit, slowing investment growth and hitting specific housing investments," the European Commission (EC) said in a recent communication.

Accordingly, experts expect the ECB, which raised its refinancing rate by 0.25 per cent to 3.75 per cent in May, to increase rates twice more before the end of this year, for a total of 0.5 per cent.

Similar trends are observed in other European countries outside the eurozone. In particular, the Central Bank of Sweden (Riksbank) at the end of June raised its key interest rate by 25 basis points - to 3.75 per cent per annum.

"In order to achieve a return of inflation to the target two per cent level in the foreseeable future, we need to tighten monetary policy further. We believe the discount rate will be raised at least once this year," the Riksbank said in a statement, which also decided to maintain its inflation forecast for Sweden for 2023 at 8.9 per cent and raised expectations for 2024 to 4.3 per cent from 4 per cent.

Recently, one of the governors of the US Federal Reserve System (FRS) Christopher Waller said that they are not yet ready to declare victory over inflation and consider it necessary to continue the process of raising interest rates this year.

According to him, the stability of the labour market and good dynamics of the US economy provide additional space for tightening monetary policy, and most likely a rate hike of 25 basis points is expected in the second half of July, and the next increase in the same amount is not excluded in September if the slowdown in inflation will not be effective enough. The Fed's inflation target in the US is set at 2 per cent.

A similar policy of increasing the cost of credit resources is observed in neighbouring Canada, where the Central Bank recently raised the key interest rate by 25 basis points - up to the maximum since 2001 5 per cent per annum. The growth rate of consumer prices in Canada in May slowed from 4.4 per cent to 3.4 per cent in annual terms, but according to the regulator's estimates, the target of 2 per cent will not be reached until mid-2025.

No less complicated processes in changes in consumer prices are also observed in the post-Soviet space, as well as in the neighbouring countries, including Azerbaijan's leading trade partners. Thus, Iran has been feverish for a number of years already, where against the background of permanent monetary catastrophe - a depreciation of the rial - inflation growth reached 69 per cent in April, having slightly decreased by summer.

The situation in Türkiye remains very difficult: in June, for the first time in 27 months, the country's regulator raised the refinancing rate to 15 per cent, but the expected stability for the national currency was not achieved: by June 30, the dollar exchange rate exceeded 26 Turkish lira for the first time in history.

The monetary factor is one of the main reasons for the accelerating flywheel of price growth in the Turkish market, and although the inflation rate has been slowed down to the lowest since December 2021 at 38.2 per cent in annual terms, such high rates of price growth carry enormous socio-economic risks for both Türkiye and its trading partners.

The recent collapse of the Russian ruble, which has lost almost 40 per cent of its value since the beginning of the year, also played the role of a catalyst that increased the rate of growth of consumer prices: annual inflation, according to Rosstat, accelerated to 3.25 per cent in June 2023, which is higher than forecasted.

At its June meeting, the Russian Central Bank kept the discount rate at 7.5 per cent, however, taking into account unfavourable forecasts, it is considering options to raise it from 0.25 per cent to 0.75 per cent during the current year.

It is quite obvious that the above factors spin the global inflationary flywheel and through trade mechanisms affect the dynamics of consumer price growth in Azerbaijan. Recall that the consumer price index in the country in January-June 2023 increased by 12.7 per cent, having decreased by 0.9 per cent in June due to seasonal factors of deflation.

The other day, a government meeting devoted to the country's socio-economic achievements in the first half of 2023 discussed the still high level of inflation and the need to take additional measures to curb it.

"Of course, double-digit inflation should make us think. I hope that by the end of this year, inflation figures may decline to a single-digit figure. Here, along with natural reasons, there are also subjective reasons, which should be more seriously studied and proposals should be made on steps to be taken by the end of the year," President Ilham Aliyev said, emphasising that against the background of the overall economic potential of the republic and the results achieved in the economic sphere, inflation at the level of 12 per cent is certainly undesirable.

The government of the republic immediately started to solve the tasks formulated by the head of state to strengthen macroeconomic stability. Thus, the resolution "On additional measures to strengthen monitoring of inflation and prices" signed by Prime Minister Ali Asadov was published afterwards.

As noted in the preamble of the document, in order to ensure the reduction of inflation to a level acceptable for economic growth, further improvement of the system of analysis and monitoring, allowing to carry out a quantitative and qualitative assessment of inflationary processes and their causes, as well as strengthening interdepartmental coordination in this area, a working group is created, the duties of which include monthly reporting on the results to the Cabinet of Ministers.

The working group will be headed by the head of the Cabinet of Ministers, and its members include deputy ministers of economy, agriculture, digital development and transport, energy, finance, health, as well as the director general of the Central Bank, deputy chairmen of the State Customs Committee, the State Statistics Committee, the Food Security Agency and the head of the State Service for Antimonopoly Supervision.

The document published by the Cabinet notes that the recent intensification of inflationary processes has become one of the main challenges facing the global economy.

"Continued geopolitical tensions in the world and economic sanctions, not fully eliminated complications caused by the pandemic, intensification of climate change and uncertainty about the prospects of the world economy also affect inflation processes.

Taking into account the intensification of internal and, especially, external factors of inflation in the country, important work has been carried out to form directions for effective control of price growth, and anti-inflationary measures carried out in this direction have created prerequisites for preventing a sharp rise in inflation.

However, identification of factors affecting inflation, further strengthening of the system of monitoring and analysis of price dynamics, formation of a close coordination structure in this direction is extremely important to achieve the level of inflation, supporting economic growth and social welfare," the document says.

It is pertinent to note that in the last year or more, key efforts to combat price growth have been made by the Central Bank of Azerbaijan (CBA): the regulator raised the discount rate five times in a row between 2022 and 2023, most recently on May 4 to 9 per cent.

However, monetary tightening has little impact on the same imported inflation factor and other external processes. And although the CBA has so far kept its annual inflation forecast for 2023 within 8 per cent, the risks of exceeding this target remain high.

In this regard, it is extremely important that from now on a powerful lever will be added to the anti-inflation efforts of the CBA in the form of the Working Group, represented by almost the entire economic bloc of the government. And this gives reason to hope that it will be possible to reduce the rate of price growth by involving other important tools - enhanced market monitoring and support for SMEs. It is also planned to launch anti-monopoly mechanisms, tighten measures against unfair competition, simplify import operations, etc., which will help to reduce the price growth rate.