The Central Bank of Azerbaijan (CBA) left its refinancing rate unchanged at 6.5% on July 25, keeping the interest rate corridor's lower and upper bounds at 5.5% and 7.5% respectively, even as it raised its inflation forecasts for this year and next.

The CBA said a tighter inflation outlook was offset by the currency market, where supply is running well ahead of demand, leaving the bank's overall policy stance unchanged. Governor Taleh Kazimov said the decision on the corridor's parameters would continue to be guided by the inflation forecast, exchange rate dynamics and bank sector liquidity for the rest of the year, with the next decision due on September 23.

Under its baseline scenario, the CBA now expects annual inflation of 6.1% by the end of 2026 and 5.8% by the end of 2027, up from May forecasts of 5.9% and 4.5% respectively. Twelve-month inflation stood at 5.8% in June, with annual price growth of 7.1% for food, alcohol and tobacco, 5.6% for paid services and 3.8% for non-food goods. Core inflation ran at 5.5%. The bank expects inflation to return to its target range from the second half of 2027, and forecasts medium-term inflation of 4.4% by June 2028.

Kazimov attributed the upward revision mainly to external cost-push factors linked to rising global energy and food prices, rather than domestic demand, saying such pressures are not expected to persist over the medium term. He noted trading partners' weighted-average inflation reached 7.7% by the end of March, adding 2.84 percentage points to Azerbaijan's inflation, while a 3.8% rise in agricultural producer prices added a further 1.6 percentage points. State and household consumption, up 10.3% and 7.4% year on year respectively in the first quarter, contributed roughly 2 percentage points, while other factors reduced inflation by 0.67 percentage points.

The manat's appreciation against trading partners' currencies is helping to curb imported inflation, Kazimov said, explaining that rising global energy prices tend to strengthen the dollar index, which in turn strengthens the manat against other currencies given that energy exporters account for 80% of Azerbaijan's non-oil and gas imports.

The central bank raised its GDP growth forecast for 2026 to 0.5%, including 2.4% growth in the non-oil and gas sector, with growth of 2.6% and 3.9% respectively projected for 2027. This compares with May forecasts of 1.1% and 3.2% for 2026 and 3.2% and 4.7% for 2027. The bank now expects Brent crude to average $87.7 a barrel this year and gas $327 per 1,000 cubic metres, against May forecasts of $84.5/b and $324; for 2027 it expects $82.5/b and $294. The current account surplus is now projected at $6.1bn for 2026 and $5.2bn for 2027, up from May forecasts of $5.5bn and $4.4bn.

Dedollarisation continued through the first half of the year. Deposit dollarisation among residents fell 3.8 percentage points to 25.6% by the end of June, down from over 40% in 2021, while non-resident deposit dollarisation fell 8.3 percentage points to 53.5%. Manat-denominated household deposits rose 11.6%, or AZN1.3bn ($0.76bn), to AZN12.5bn ($7.35bn) by July 1, while the number of unique depositors nearly doubled to 220,000 from 113,900 at the start of 2024. Kazimov said retail sales of dollars in the cash market now outpace purchases by more than $500mn, a trend some attribute to falling real incomes prompting households to sell foreign currency held outside the banking system, alongside a parallel rise in manat deposits.

The CBA bought $2.077bn in the currency market between January and July as it sought to manage the resulting oversupply. Auction sales fell sharply to $757mn in the first half of the year, from $2.7bn in the same period of 2025 and $3.6bn in 2024; only 11 of 34 planned auctions since April attracted any buyers, a situation Kazimov said had not occurred since 2016-17. Reserves rose 19.5%, or $2.2bn, to $13.8bn over the same period. Interbank trading on the Bloomberg platform, in use since 2023, hit a record turnover this year; in the first quarter alone, Azerbaijani banks concluded 1,041 deals worth AZN42.1bn ($24.76bn) on the platform, up 86.3% year on year in value though down 10.4% in deal count.

Excess sector liquidity, excluding mandatory reserves, reached AZN6bn ($3.53bn) by the end of the first half, more than double the December level, of which banks have an estimated AZN4.6bn ($2.71bn) available for lending or capitalisation, Kazimov said. Average daily AZIR rates stood at 6.43% in May and June and 6.39% so far in July. New deposit rates fell 0.5 percentage points for individuals and 0.3 percentage points for legal entities compared with June 2025, when the CBA began cutting its refinancing rate, which it has lowered by a cumulative 0.75 percentage points over the past year; new lending rates fell 0.2 percentage points for individuals and 0.3 percentage points for legal entities. Kazimov said lending rates were not falling as fast as the bank would like, attributing this largely to insufficient competition in the banking sector, and said changes to the refinancing rate typically take three to six months to feed through to credit.

Merchandise trade recorded a surplus of nearly $8bn in the first half of 2026, according to customs data cited by the CBA, while the balance on remittances reached $540.6mn, up 82.8% year on year. The number of registered insured individuals in Azerbaijan's personal accounting system rose by 71,668 in the first half of the year to reach 5,399,765 by July 1, the State Social Protection Fund said.

Kazimov said current macroeconomic conditions gave no grounds for the central bank to shift to an alternative policy framework, saying its existing approach was adequate to meet potential challenges over the medium and long term. He added that the fixed exchange rate regime remains the main anchor of monetary policy, with the refinancing rate serving as a supporting tool, and that rate decisions are based on a three-month forward view of inflation rather than reactions to short-term fluctuations.