(Economist Intelligence Unit) -- Consumer price inflation stood at 1.3% year on year in August, down from an average of 1.7% year on year in January-June.
Inflation remains extremely low in Azerbaijan, owing in particular to low food prices, which were unchanged in August from a year earlier. Service costs have also risen very slowly, and were up by just 0.5% in August compared with the same period of 2013.
By contrast, prices of non-food goods rose by 3.6% year on year in August. Non-food goods inflation is at its highest rate since the 2009 financial crisis. It is unclear why inflation in this category has picked up, as domestic demand has weakened in 2014, although the low base year (prices for non-food goods rose just 0.8% year on year in 2013) has played a role.
We expect inflation to remain low in 2015, at an average of 2.1%. Public spending is projected to be flat in real terms, as the government seeks to consolidate the budget and reduce dependence on transfers from the oil fund. Nominal income is also likely to grow more slowly than in recent years, owing to weaker economic
growth.
In addition, the trade-weighted exchange rate is likely to strengthen over the coming two years. This is because we expect the authorities to maintain the hard peg to the dollar throughout the forecast period. As US monetary policy tightens, this will lead to a strengthening of the dollar, and therefore the manat, against the euro and most emerging-market economies.
The euro and Turkish lira are projected to fall by more than 6% against the manat in 2015-16, compared with the 2014 average, while the rouble will fall by over 5% in 2015 before recovering in 2016. This will strengthen the purchasing power of the manat against its main trading partners, and should constrain import prices.
External inflationary pressures are also expected to be weak. We forecast that food prices will fall by 6.5% next year, while oil prices will fall by 3.4%. As a result, we expect the Central Bank of Azerbaijan to hold the policy rate at 3.5% (its lowest level since the financial crisis of 2009), until at least mid-2015.
Bakudaily.Az
