Azernews.Az

Qabil Ashirov

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The Central Bank of Azerbaijan announced its latest decision on the refinancing rate today, and the main direction of the decision coincided with the forecast we published in Azernews on September 17. More precisely, the Central Bank did not cut the refinancing rate, but lowered the lower bound of the interest rate corridor from 5.5% to 5%. The refinancing rate was kept at 6.5%, while the upper bound of the corridor remained at 7.5%.

At first glance, this is not an interest rate cut, and it would not be correct to present it as such. However, the substance of the decision is not limited to the fact that the 6.5% refinancing rate remained unchanged. In fact, by reducing the lower bound of the interest rate corridor by 50 basis points, the Central Bank has created somewhat greater room for softer monetary conditions to emerge in the money market.

The key issue here, however, is the environment in which the decision was made. According to the Central Bank's statement, structural liquidity surplus in the banking sector reached AZN 6.3 billion at the end of August. This figure is 2.2 times higher than at the end of 2025. At the same time, interest rates on key indicators in the unsecured money market have also moved downward: the average daily AZIR stood at 6.39% in July, 6.28% in August, and 6.02% in the period elapsed in September.

This means that one of the main challenges currently facing the Central Bank is not the high cost of money, but ensuring that the high liquidity that has emerged in the banking system is transmitted to the market more effectively. The reduction of the lower bound is justified precisely by this objective. The Central Bank says that widening the corridor should reduce its participation in the money market and create conditions for banks to conduct more active operations with each other.

It is interesting to look at which part of the forecast we put forward on September 17 has materialized. The main idea of that forecast was that the Central Bank would maintain a “wait-and-see” position through the end of 2026 or could cautiously move toward easing in order to support economic activity. Today's decision stands between these two approaches: the refinancing rate was left unchanged, but the lower part of the interest rate corridor was reduced.

In other words, the Central Bank has not yet entered a conventional interest rate-cutting phase. However, today's decision shows that some room for such a step in the future has been created.

Inflation will be the key condition for this.

Annual inflation in Azerbaijan stood at 5.7% in August. This was 0.1 percentage point lower than in July and remained within the Central Bank's target range of 4% ±2 percentage points. Core inflation was 5.1%. The Central Bank has maintained its forecast that inflation will remain within the target range over the medium term.

These figures provide the Central Bank with some room for maneuver. Inflation is no longer above the upper limit of the target range. On the other hand, a rate of 5.7% still does not mean a low-inflation environment. Therefore, reducing the lower bound of the interest rate corridor instead of immediately cutting the refinancing rate can be viewed as a more cautious step.

Another important factor is the manat market. According to the Central Bank, during the first eight months of 2026, supply in the foreign exchange market significantly exceeded demand. During the same period, the Central Bank's foreign exchange reserves increased by 32.9% to $15.3 billion. Meanwhile, a positive balance of $10.4 billion was recorded in foreign trade in January-August.

This picture is important from the perspective of monetary policy. One of the main risks the Central Bank takes into account when lowering interest rates is the emergence of pressure on the foreign exchange market. The current figures, at least, indicate that there is no significant pressure in this direction.

Therefore, it would not be correct to sum up today's decision simply by saying that “the interest rate remained unchanged.” In fact, while keeping the main policy rate at 6.5% in order to preserve inflation expectations, the Central Bank reduced the lower bound of the interest rate corridor to 5% amid high liquidity in the banking system. This is a rather cautious monetary signal.

The main question now is this: could the refinancing rate itself also be lowered following today's ecision?

The answer is not “yes” or “no” for now. But today's decision contains elements that make future interest rate cuts a more realistic scenario than before. If inflation continues to move downward, stability in the foreign exchange market is maintained, external-sector indicators remain positive, and no additional inflationary pressure emerges from domestic demand, the grounds for the Central Bank to reconsider the 6.5% refinancing rate could strengthen.

Conversely, if energy and food prices experience a new surge, global inflationary pressure intensifies, and this is transmitted to domestic prices from Azerbaijan's major trading partners, today's decision cannot be viewed as a guarantee of a future rate cut. The Central Bank itself says that these risks remain relevant.

There is another interesting detail here. The date for announcing the next interest rate decision has been moved from November 4 to October 29. This date will cause the market to focus more quickly on the Central Bank's next move.

Thus, in my view, the main message of the September 23 decision is broader than the fact that the refinancing rate remained unchanged. The Central Bank has not yet lowered interest rates. However, the 50-basis-point adjustment to the lower bound shows that room for maneuver in monetary policy has expanded somewhat compared with before.

The main thesis of the September 17 forecast is confirmed precisely here: rather than joining the global monetary easing race, the Central Bank is currently acting cautiously, preserving domestic macroeconomic stability while moving carefully. Today's decision, meanwhile, can be read as one of the first small steps in that cautiousness toward easing.

However, the main decision is still ahead. For the first step below 6.5% to be taken, the biggest argument before the Central Bank will once again be inflation.