BAKU, Azerbaijan, January 12. The average
interest rate for one-day unsecured operations in the money market,
the policy rate’s operational target through the Azerbaijani
Interbank Rate (AZIR), has begun to influence other market rates,
Elchin Gulaliyev, Deputy Director of the Central Bank of
Azerbaijan's (CBA) Monetary Policy Department, told Trend.


He noted that the Central Bank will continue refining its
operational framework to enhance the transmission of the policy
rate to the financial sector in 2026, emphasizing efforts to
strengthen the impact of the policy rate on market interest rates,
maintain price stability, and manage liquidity in the banking
system efficiently.


Gulaliyev began by noting that at the end of last year, the gap
between the discount rate and the AZIR, the auxiliary operational
target of monetary policy, which represents the average interest
rate for 1-day transactions in the unsecured money market, had been
significantly reduced. He emphasized that the Central Bank will
continue refining its operational framework in 2026 to further
strengthen the influence of the discount rate on interest rates
across the financial sector.


"The AZIR on 1-day unsecured interbank transactions was managed
very close to the discount rate in 2025. This alignment reflects
improvements in the operational framework, along with the active
use of open market operations and the 7-day deposit instrument. The
data confirms this success: the standard deviation between the
discount rate and AZIR was just 0.28 percentage points, and in the
last three months, it dropped sevenfold to 0.04 percentage points.
Another key development is that during this period, the discount
rate began influencing other interest rates through AZIR. For
instance, the reduction of the discount rate by 25 basis points in
July 2025 not only affected the returns on securities but also led
to lower deposit and loan rates," he explained.


Looking ahead, Gulaliyev said that the Bank will continue
enhancing its operational framework in 2026 to reinforce the
discount rate’s transmission across the financial sector. All
available tools will be employed to manage AZIR close to the
discount rate, with careful attention to the banking system’s
liquidity position.


He also highlighted the Bank’s inflation targets, noting that
while the Central Bank plans to keep inflation within a 4±2% range
in 2026, the October 2025 forecasts projected annual inflation at
5.7%. Gulaliyev stressed that in a climate of rising external
risks, the Bank will rely on key monetary policy instruments to
maintain inflation within the target range.


"Keeping inflation within the target range is a key condition
for achieving long-term sustainable economic growth. In making
monetary policy decisions in 2026, the Central Bank will carefully
evaluate both internal and external factors that could influence
inflation, along with associated risks. We expect the inflation
forecast under the base scenario to materialize, with inflation
remaining within the target range. The Central Bank updates its
inflation forecasts every quarter based on a thorough analysis of
these factors. Building on this approach, in 2026, the Central Bank
will also provide macroeconomic forecasts under alternative
scenarios, allowing it to assess potential inflation risks and
respond flexibly if needed. The Bank will use all tools at its
disposal to achieve its monetary policy objectives," Gulaliyev
said.


The CBA official also outlined how the Central Bank plans to
maintain exchange rate stability amid global trade uncertainties
and import-driven inflation pressures.


"In 2025, the foreign exchange market remained stable, with
supply and demand prevailing across both cash and non-cash
segments. Under these conditions, the Central Bank's foreign
exchange reserves rose by 4.3%, reaching $11.4 billion.







Forecasts indicate that the current account surplus of the
balance of payments in 2026 will support stability in the foreign
exchange market. Under the base scenario, the current account
surplus is expected to reach $3 billion, equivalent to 3.7% of
GDP.


As is standard practice, the Central Bank conducts auctions for
the sale of foreign exchange funds from the State Oil Fund for
fiscal purposes. At the same time, it reserves the right to
intervene in the foreign exchange market if temporary supply-demand
imbalances arise. Any such operations will be communicated to the
public, as in previous periods," he added.


Flexible management of liquidity in the banking system through
open market operations and other instruments remains a cornerstone
of the Central Bank's monetary policy. Gulaliyev highlighted the
key indicators that guide the Bank in assessing liquidity positions
amid the current global financial environment and explained how the
steps taken in this context support both inflation control and
financial stability. He emphasized that the Central Bank applies
its monetary policy tools by carefully monitoring money market
dynamics and the liquidity position of banks:


"As is well known, a bank’s liquidity is influenced by both
autonomous factors, which operate independently of the CBA, and
non-autonomous factors, which are linked to the CBA. Autonomous
factors primarily include changes in government accounts.


The Central Bank's toolkit includes instruments for both
liquidity sterilization and liquidity provision. Sterilization
instruments include overnight standing facility deposits, CBA
notes, and 7-day open market deposit operations, while liquidity
provision instruments consist of overnight standing facility
reverse repos and 7-day open market reverse repos. By using these
tools, the Central Bank ensures that short-term interbank interest
rates, particularly AZIR, respond effectively to changes in its
interest rate corridor.


At present, the banking sector has short-term excess liquidity,
which is mainly managed through 7-day deposit operations as part of
open market activities.


The Central Bank is also focusing on strengthening the interest
rate channel in the transmission of monetary policy. Special
attention will continue to be given to this area in the coming
period," he added.


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