Azerbaijan expects inflation to fall to target level by end of summer

Russia’s Gazprombank expects inflation to decelerate to a level close to the target corridor of the Central Bank of Azerbaijan (CBAR) (4% +/-2 pps) in July-August, said Gulnara Khaidarshina, chief CIS economist, deputy head of research at Russia’s Gazprombank, reports.

She noted that inflation remains beyond the CBAR’s target corridor (4% +/-2 pps), exceeding its upper bound by 550 bps and the refinancing rate by 250 bps.

“CPI in Azerbaijan again decelerated in May to 11.5% YoY, down by 1.3 pps compared with April. The deceleration of inflation last month was again seen across all segments – food, non-food products and services. Food inflation in Azerbaijan slowed to 12.7% YoY, down by 2.47 pps compared with March. Deceleration of price growth was seen in meat, buckwheat, eggs, bread, sunflower and corn oil, as well as fruits and vegetables. At the same time, prices for sugar and non-alcoholic beverages continued to accelerate.

Inflation in the non-food segment continued to decelerate in May and amounted to 10.7% YoY (-0.6 pps MoM), driven by slower growth in prices for lumber, paper and laptops. That said, growth in prices for footwear, refrigerators, air conditioners and bicycles continued to accelerate, which is likely due to heightened demand for certain types of goods in the summer.

Growth in the services segment decelerated by 0.2 pps to 10.5% YoY. That said, the downtrend was somewhat mitigated by a steady increase in prices for housing rental, household appliances and apartment repairs, as well as catering and cosmetics services,” she added.

She reminded that during its May meeting, as one of the inflationary factors, the CBAR noted the expansion of aggregate demand amid support from fiscal stimulus, FX inflows to the domestic market and high lending activity. According to CBAR data, as of 4M23, supply exceeded demand by 97% at CBAR FX auctions (conducted twice a week on Tuesday and Thursday). As an additional growth driver in the non-oil & gas sector, Azerbaijan’s Central Bank highlighted implementation of the fourth package of social reforms.

“Amid stimulatory fiscal policy, the money supply in AZN terms has increased by 1.8x since the onset of the pandemic and exceeds 20% of GDP. Growth of the money supply has remained significant in annual terms, totaling 24.7% YoY (~2.1% YTD). We note that the budget deficit for this year is planned at 2.5% of GDP, taking into account all recent upward revisions of revenues and expenditures (vs. 1% of GDP last year). This may lead to further expansion of the money supply and prompt the CBAR to ramp up operations aimed at absorbing excess liquidity,” she added.

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