Policy rate falls: Is inflation in Azerbaijan on track? Caliber.Az analysis

As global inflation expectations have eased in many countries, efforts to improve GDP dynamics, reduce the tax burden, and expand business incentives have gained priority. In line with these goals, central banks worldwide have lowered their policy rates over the past and current years.

Following this trend, the Central Bank of Azerbaijan (CBA) also cut its policy rate several times, bringing it to 7% in July 2025. Since then, the rate had remained unchanged.

Recently, based on actual and forecasted inflation aligning with target parameters, the CBA board decided to reduce the policy rate from 7% to 6.75%, a decrease of 0.25 percentage points. At the same time, the parameters of the interest rate corridor were adjusted accordingly.

Since the beginning of 2025, the global economic system has been under pressure from negative factors, particularly the intensifying trade tensions between the world’s major economic centres. Against this backdrop, it is unsurprising that the July report of the International Monetary Fund (IMF), World Economic Outlook, projected global economic growth for 2026 to increase by only 0.1 percentage points, reaching 3.1%. This means that expected GDP growth remains well below the IMF’s long-term average of 3.7%, close to pre-crisis levels.

Under these circumstances, regulators in leading economies are attempting to stimulate economic capitalisation by easing monetary policy and lowering policy rates.

In June 2025, the European Central Bank (ECB) cut its key interest rate for the eighth time since mid-last year, lowering it by 0.25 percentage points to 2%. Meanwhile, the U.S. Federal Reserve (Fed) reduced its policy rate in September by 0.25 percentage points, from 4.25% to 4%. With the labour market showing signs of weakening, the Fed is expected to cut the rate further to 3.5% in December.

Overall, this year, policy rates have been reduced in Türkiye, Russia, Kyrgyzstan, and in 16 countries worldwide.

The policy rate is the tool through which both global and local central banks set the interest rates at which they lend to commercial banks and accept their deposits. This rate also influences other rates, including deposit and loan rates offered by commercial banks, as well as penalties and various financial operations.

A central function of the policy rate, alongside broader monetary policy, is to control consumer inflation. During periods of price stability, or to stimulate economic growth or support recovery from a recession, the policy rate is lowered to encourage the flow of financing into the economy. Conversely, when the financial system is overheating and consumer prices are rising, the rate is increased, acting as a “brake” on banks and other sources of funding for production, trade, investment, and related economic activities.

How are inflation risks in Azerbaijan shaping up in this context? The dynamics over the year have been mixed. In the first half of 2025, inflation in the country accelerated, mainly due to rising prices for goods imported from major trading partners, as well as increases in government-regulated tariffs. As a result, average annual inflation rose from 0.7% in the first half of 2024 to 5.9% by the end of June 2025.

However, in the second half of the year, price growth moderated somewhat. The IMF considers that overall inflation in Azerbaijan remains under control and within the target range set by the Central Bank of Azerbaijan (CBA). In its October review, The World Economy in a State of Uncertainty, IMF experts forecast average annual inflation in Azerbaijan at 5.7% for 2025, falling to 4.5% in 2026 and further to 4% by 2030.

Notably, these IMF projections closely align with forecasts from Azerbaijan’s Ministry of Economy, which expects average annual inflation of 5.4% in 2025, declining to 4.8% in 2026, and reaching 4.5% in 2027.

Imported inflation plays a significant role in Azerbaijan, but due to falling inflation expectations in several of the country’s trading partners, overall price growth risks have been somewhat contained. The CBA has identified domestic cost pressures and government spending as the main internal drivers of inflation. However, upward and downward inflation risks largely offset each other, allowing the country to lower the policy rate more confidently and ease monetary policy.

Global and domestic trends observed since autumn provided the regulator with grounds to reduce the rate, sending a signal to the local banking sector and investors to lower borrowing costs. Experts from the international analytics firm Fitch Solutions (FS) shared a similar forecast in early December, noting that the CBA’s key policy rate is expected to fall to 6.75% by the end of 2025 and to 6.5% by the end of 2026. This downward trend is linked to moderately slower economic growth amid lower global oil prices.

It seems that Fitch Solutions’ experts were not mistaken in their expectations. Recently, the board of the CBA decided to lower the policy rate by 0.25 percentage points to 6.75%. Accordingly, the lower bound of the interest rate corridor was reduced from 6% to 5.75%, and the upper bound from 8% to 7.75%.

“The decision was made taking into account the alignment of actual and forecasted inflation with the target range (4±2%), the current situation in the global economy and financial markets, domestic macroeconomic trends, and the transmission of monetary policy decisions to the real sector,” the regulator said in a statement published on December 10.

The CBA also emphasised that annual inflation in Azerbaijan remains on a predictable trajectory and within the target range: “In October 2025, 12-month inflation stood at 5.9%. Annual price growth reached 8.2% for food, alcohol, and tobacco, 5.6% for paid services, and 2.5% for non-food goods. Inflation is mainly influenced by external and domestic cost factors, and core inflation on a yearly basis was 5%.”

Overall, under the baseline scenario, the forecast that annual inflation will remain within the target range by the end of the current year and next year remains unchanged. At the same time, CBA experts believe that analysis of current trends points to the possibility of revising next year’s inflation forecast downward. The regulator noted that an assessment of changes in the balance of inflationary risks since the previous policy rate meeting indicates a relative decline in pro-inflationary factors.

However, this does not mean that inflationary risks have disappeared. On the contrary, the CBA highlights that geopolitical tensions and instability in the global trade environment continue to sustain high uncertainty in commodity and financial markets. Key external risks are related to the pass-through of import prices to domestic inflation, which will depend on inflation trends in Azerbaijan’s trading partners and the dynamics of the nominal effective exchange rate.

Domestic downside risks are mainly shaped by supply and cost factors. Meanwhile, the initial parameters of the 2026 state budget and a slowdown in annual credit growth reduce the likelihood of excessive aggregate demand pressures.

In any case, during the November discussion of the “2026 State Budget” draft, the Chairman of the Central Bank of Azerbaijan, Taleh Kazimov, emphasised that the main goal of the regulator’s monetary policy next year will remain keeping inflation within the target range (4±2%).

“In 2026, monetary policy will be conducted within the existing framework, and exchange rate stability will also remain a key factor in price stability,” the CBA Chairman noted. “Fiscal policy is not expected to have a significant impact on inflation, and the CBA will work closely with fiscal authorities to effectively manage aggregate demand.”