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Qabil Ashirov

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The US Federal Reserve (Fed) raised interest rates on Wednesday for the first time in more than three years, increasing the target range for the federal funds rate by 25 basis points to 3.75%–4.00%. The move, which fully met market expectations, also signaled new rate hikes in the near future. The decision by the monetary authority of the world’s largest economy effectively signals the beginning of a new phase in global financial markets.

It is clear that the period of monetary easing that prevailed around the world since the second half of 2025 is now behind us. At that time, amid easing inflation, central banks were expected to gradually cut their policy rates, and many regulators, including the Central Bank of Azerbaijan (CBA), had begun lowering rates. However, renewed tensions in the Middle East at the beginning of 2026 and their direct impact on oil prices reignited global inflationary pressures.

As if the imbalance created in energy markets by the Russia-Ukraine war, which has continued since 2022, were not enough, geopolitical chaos surrounding the Gulf countries with major oil and gas reserves and Iran once again triggered fuel price rises. As a result, the optimism surrounding rate cuts in the second half of 2025 soon gave way to sharp monetary tightening. Rate hikes by the central banks of Europe and Japan in the summer of 2026 were the first signals of this trend.

In the US, meanwhile, inflation rose to 3.4% in September (the expected target was 2%), while non-farm payrolls came in at around 160,000, compared with a forecast of 50,000, indicating that the labor market was overheating. The fact that both indicators significantly exceeded expectations forced the Fed to take the inevitable step of raising its policy rate. The same scenario is now expected to be repeated by Europe and Japan, while the Fed is also expected to proceed with further rate hikes.

As a rule, when the central banks of developed countries, particularly the Fed, raise interest rates, the yields on assets in developed countries rise sharply, making those assets more attractive to global investors. As a result, massive capital outflows from emerging markets (EMs) begin, local currencies come under depreciation pressure, and yields on government bonds in those countries rise. Research by the International Monetary Fund (IMF) also confirms that unexpected tightening of monetary policy in Washington puts direct pressure on the currencies of emerging markets. For this reason, these countries are forced to follow the Fed and other major central banks and raise interest rates in order to retain capital.

So, what position will the Central Bank of Azerbaijan take against the backdrop of this global storm? To answer this question, it is enough to look at the latest macroeconomic indicators presented by the CBA.

First, the volume of deposits in the country’s banking sector has reached a record level of AZN 44 billion, according to the latest reports. Of this amount, AZN 17 billion consists of deposits held by individuals, while the remainder belongs to legal entities and institutional organizations. For comparison, during the same period last year, medium- and small-sized banks offered interest rates of 12% on manat deposits, while the figure has now fallen to 10%. This indicates that liquidity in the banking system is sufficiently high.

Second, there is a huge positive balance in foreign trade turnover. According to data from the State Customs Committee for August, a positive trade balance of $10.3 billion was recorded in the first eight months of 2026. The CBA’s latest report also confirms this: last month alone, the regulator purchased $1.5 billion from the foreign exchange market, increasing its foreign currency reserves to $15.3 billion. This is the highest level recorded since the devaluation in 2015.

Third, inflation stood at 5.7% in August, which is within the CBA’s target range of 4% (±2%) and indicates that price growth in the domestic market remains under control.

Final Analysis and Forecast

The Central Bank of Azerbaijan’s policy rate currently stands at 6.5%, and this level has remained unchanged since February 5, 2026.

All these data show that, unlike many emerging markets, Azerbaijan’s large foreign currency reserves, stable foreign trade surplus, and the manat’s fixed exchange rate regime against the US dollar serve as strong buffers protecting the country from the direct negative effects of global monetary tightening.

If no force majeure geoeconomic shocks occur in domestic or global markets in the near future, we can expect the Central Bank of Azerbaijan to maintain a “wait-and-see” position through the end of 2026 or cautiously lower interest rates in order to support domestic business activity. Rather than joining the global race for higher interest rates, the CBA is likely to prioritize maintaining domestic macroeconomic stability and high liquidity.