CBA Considers Shift to Sterilization Amidst Foreign Exchange Market Stability

The Central Bank of Azerbaijan (CBA) is contemplating a strategic shift from intervention to sterilization measures as part of its efforts to uphold stability in the foreign exchange market. Following a period of heightened demand for the dollar in February, recent indicators suggest a marked stabilization in March, with requests for foreign currency totaling $68.9 million in the latest auction—a stark contrast to the $870.6 million registered in February, representing a 2.6-fold increase compared to the same period last year.

Deputy economist Vyugar Bayramov lauds the positive development of reduced dollar demand in March, emphasizing the importance of the CBA's continued communication and support measures, particularly in light of increased foreign travel during the month. Bayramov underscores the significance of the CBA's monetary policy direction for 2024, which underscores the pivotal role of oil prices in shaping the exchange rate of the Azerbaijani manat. With oil revenues traditionally serving as the primary determinant of the country's exchange rate dynamics, the CBA's commitment to intervening in the foreign exchange market when necessary underscores its readiness to utilize foreign exchange reserves to mitigate volatility stemming from fluctuations in energy markets.

Bayramov highlights the evolving landscape of the foreign exchange market, suggesting that the stabilization of dollar demand augments the CBA's influence over market dynamics. In light of these developments, Bayramov posits that the CBA may transition towards sterilization measures, a monetary policy tool aimed at offsetting the potential inflationary impact of foreign exchange interventions by neutralizing the increase in money supply through corresponding adjustments in domestic securities.

The CBA's potential pivot towards sterilization underscores its commitment to maintaining macroeconomic stability amidst evolving market conditions. By harnessing a combination of intervention and sterilization measures, the CBA seeks to strike a delicate balance between exchange rate management and inflationary pressures, thereby safeguarding the integrity of the Azerbaijani economy amidst external uncertainty, and in particular in the complex dynamics of the global energy market.