Azernews.Az

Qabil Ashirov

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The Central Bank of Azerbaijan's latest inflation forecast may appear modest at first glance, but it offers an important clue about the direction of monetary policy over the coming year. While the institution has slightly raised its inflation expectations, the revised outlook still points to price growth remaining within its target range. If that assessment proves correct, there is little reason to expect any major change in interest rates in the near future.

According to the Central Bank, annual inflation is now expected to average 6,1% in 2026, compared with an earlier forecast of 5,9%. The projection for 2027 has also been revised upward from 4.5% to 5.8%. The changes reflect a somewhat less favorable external environment, including higher global food prices, stronger inflation among Azerbaijan's trading partners and a weaker disinflationary effect from the nominal effective exchange rate. These factors suggest that imported inflation will remain an important source of price pressure over the coming quarters.

Despite the revisions, one fact stands out. The projected inflation rates remain within the Central Bank's medium-term target corridor of 4% plus or minus 2 percentage points. In other words, inflation is expected to hover around the boundary of 6%, even after the forecast was revised higher. That distinction matters because central banks typically respond aggressively only when inflation threatens to move persistently outside their target range or when inflation expectations become unanchored.

The latest projections therefore do not describe an economy facing an inflation problem that requires immediate monetary tightening. Instead, they describe an economy where inflation risks have increased somewhat but remain manageable. This is an important difference. Raising interest rates is a costly policy decision because it slows borrowing, investment and economic activity. If inflation is already expected to remain within the desired range, policymakers have little incentive to impose additional costs on the economy.

The Central Bank's latest statement also contains no indication that policymakers believe the current level of the refinancing rate has become insufficient. On the contrary, the revised forecasts suggest that the existing policy stance is still expected to bring inflation back toward the 4% objective over time. From a monetary policy perspective, this is an argument for patience rather than action.

Of course, monetary policy is never predetermined. Unexpected shocks could still alter the outlook. A renewed surge in global commodity prices, stronger-than-expected domestic demand, significant fiscal expansion or geopolitical developments affecting supply chains could all push inflation above current expectations. Likewise, a sharp decline in inflation or weaker economic growth could eventually justify lower interest rates. Central banks continuously adjust their decisions as new information becomes available.

However, monetary policy should be assessed based on probabilities rather than possibilities. At present, the Central Bank's own forecasts imply that inflation will remain relatively stable over the forecast horizon. Although the institution has become slightly more cautious by raising its projections, it has not signaled that inflation is expected to move beyond its acceptable range. That is perhaps the most important message contained in the latest update.

Viewed through that lens, the most likely scenario is one of policy continuity. If inflation evolves broadly in line with the Central Bank's projections, the refinancing rate is likely to remain unchanged through the remainder of 2026. Extending that logic further, the same conditions would also support keeping interest rates broadly unchanged through at least the middle of 2027. This should not be interpreted as a firm prediction, since monetary policy always depends on incoming economic data, but rather as the baseline scenario implied by the Central Bank's own inflation outlook.

Financial markets often focus on whether inflation forecasts move higher or lower. In this case, however, the more important story may be where those forecasts ultimately remain. Despite the upward revision, inflation is still expected to stay under control rather than accelerate. As long as that assumption holds, stability—not further tightening or easing—appears to be the most probable course for Azerbaijan's monetary policy over the coming year.