Page 22 - Caucasus Outlook 2025

annual inflation remaining within the target range of 2% to 4%. By November, inflation had stabilised at 2.3%, compared with 6.5% at the end of 2023. Core inflation, which excludes volatile items such as food and energy, was reported at 2.1%, demonstrating effective containment of underlying price pressures. These results were driven by the central bank's strategic adjustments to the key policy rate, which peaked at 9.25% in early 2024 before being reduced to 7.75% by November as inflationary pressures eased.
The main contributors to inflation throughout the year were energy prices, which rose by 5% in the first quarter but stabilised in subsequent months, and food prices, which rose by 7.8% y/y due to global supply chain disruptions and regional agricultural challenges. Conversely, the 6.3% appreciation of the Armenian dram against the US dollar helped to offset the impact of higher import costs and keep overall inflation under control.
On the monetary policy front, the Central Bank of Armenia maintained a careful balance between supporting economic growth and containing inflation. Reserve money growth was limited to 3.5% y/y, and open market operations ensured liquidity levels consistent with policy objectives. The central bank's inflation targeting framework, coupled with effective communication strategies, anchored inflation expectations at an average of 2.8% for 2024. Fiscal adjustment also played a role, with government spending increasing by 8% compared to 2023, mainly directed towards capital investment, while avoiding excessive stimulus that could fuel inflation.
4.3 Inflation & Monetary Policy – Azerbaijan
Azerbaijan faced moderate inflationary pressures in the first eleven months of 2024, with the average consumer price index rising 2.0% y/y. End-of-period inflation accelerated to 4.4% in November, driven by higher costs in services (+5.8%) and food, beverages and tobacco (+2.6%). Non-food products saw a smaller increase of 2.1%, indicating contained inflation in that segment.
The Central Bank of Azerbaijan maintained a tight monetary policy to manage inflation risks, keeping the benchmark interest rate at 9.0%, with a corridor ceiling of 10.5% and a floor of 7.5%. Broad money supply (M3) reached AZN26.9bn by October, reflecting cautious liquidity management. The manat remained stable against major currencies, supported by foreign exchange reserves of $10.97bn as of November.
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