Baku: Increasing external financial buffers in Azerbaijan significantly reduce risks to the exchange rate regime, which maintains the manat at 1.70 against the US dollar.

According to Azeri-Press News Agency, the likelihood of this triggering pressure on the manat's 1.70/USD peg has diminished. A stronger-than-expected 2.6% GDP consolidated budget surplus last year boosted liquid assets at SOFAZ and the central bank to roughly 110% of GDP, giving policymakers ample capacity to defend the currency if needed. Meanwhile, the recent appreciation of floating regional currencies - including the Kazakhstani tenge and Uzbekistani soum - makes the pegged manat less of an outlier, easing relative pressure.

On the rates side, the forward-looking indicators paint a relatively dovish picture. Slower-than-expected 1.4% GDP growth in 2025, easing inflation at 5.2-5.3% YoY, and a declining FX share in bank deposits all support the case for eventual monetary easing. Still, caution is warranted; the consolidated fiscal balance excluding SOFAZ fuel revenues widened to 11% of GDP last year due to higher spending, while the external trade balance deteriorated as imports outpaced exports. These trends argue for maintaining the current stance in the near term, with any cuts contingent on firmer evidence of sustained disinflation and improved fiscal discipline. The Central Bank of the Republic of Azerbaijan is expected to leave the policy rate unchanged at 6.75% at the 4 February meeting.