Azerbaijan raises rate 200 bps to boost manat confidence

    Azerbaijan's central bank raised its benchmark refinancing rate by 200 basis points to 5.0 percent to strengthen confidence in the manat currency, encourage growth of domestic deposits and improve its monetary policy tools and the money market.
    The Central Bank of the Republic of Azerbaijan (CBA), which cut its rate by 50 basis points in July last year, added that the lower limit of its interest rate corridor was set a 2.0 percent while the upper limit was set at 10 percent.
    The CBA, which shifted to a floating exchange rate regime in 2015, added that stability in the foreign exchange rate market would be helped by banks offering more attractive rates for manat deposits and by offering local currency bonds at a higher yield.
    The economy of Azerbaijan - which is located west of the Caspian Sea, north of Iran and south of Russia - has been hard hit by the fall in crude oil prices. Oil and gas account for 95 percent of the country's exports and 75 percent of government revenue.
    Since 2011 the CBA had effectively pegged its manat currency to the U.S. dollar but the central bank had been drawing heavily on its reserves to defend the peg as bank depositors began converting savings into dollars in light of impact of the the fall in crude oil prices on economic activity.
   On Feb. 16, 2015 the CBA abandoned that peg in favor of a dollar-euro basket. Then on Feb. 21 it devalued the manat by 33.5 percent against the dollar and by 30 percent against the euro with the manat's exchange rate set at 1.05 to the dollar.
    On Dec. 21, 2015 the central bank shifted to a floating exchange rate regime to help the country's competitiveness and let the value of the manat be set by supply and demand.
    Since that shift, the manat has depreciated slightly, trading at 1.588 to the dollar today, down 1.8 percent since the beginning of the year and down 51 percent since the end of 2014.
    So far this month, the CBA has held seven foreign exchange auctions as part of its new regime in which it has offered $200 million in each auction, with the central bank saying it had supplied less than demand with the result that the exchange rate has strengthened "slightly."
    Azerbaijan's inflation rate rose to a 2015-high of 4.0 percent in December from 3.7 percent in the previous three months.

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