Azerbaijan Raises Rate for Second Time to Arrest Run on Currency

  • Central bank follows February's rate hike with increase to 7%
  • Cheaper oil battering Azeri economy, putting pressure on manat

The Azeri central bank raised its key interest rate for the second time in less than a month to stem a run on the national currency that’s continuing to erode reserves.

The benchmark was increased to 7 percent, the highest since 2008, from 5 percent, the central bank in Baku said in an e-mailed statement on Friday. The move will “ensure sustainable macroeconomic stability” and encourage savings in the manat, it said. The upper end of the central bank’s rate corridor was raised to 17 percent from 10 percent while the lower limit was kept at 2 percent.

As cheaper crude prices ravage the economy of the former Soviet Union’s third-largest oil exporter, the central bank drained more than half of its reserves last year to support the currency before shifting to a free-floating exchange rate in December. Last month’s rate increase, Azerbaijan’s first in almost five years, has done little to restore confidence, with the manat dropping more against the dollar since the decision than all but two currencies in the world.

“Rates on manat deposits and the money market were too low to tame devaluation expectations,” said Dmitry Polevoy, chief economist for Russia and the Commonwealth of Independent States at ING Groep NV in Moscow. “Moreover, rates on foreign-currency funding in the banking sector were too high to kick-start de-dollarization.”

Manat Savers

The turmoil has prompted an exodus by savers from accounts in the manat, putting more pressure on banks and the foreign-exchange market. In Azerbaijan, the share of dollar deposits is estimated at as high as 75 percent, according to Fitch Ratings.

The manat, the worst performer globally against the dollar in 2015 with a 50 percent loss, is down another 3 percent this year. The central bank has sold $367.5 million in auctions last month alone to feed lenders’ appetite for foreign currency.

Authorities have shut every seventh lender in the country since the crisis hit, rushing to consolidate the financial industry and culling banks for failing to meet capital requirements. President Ilham Aliyev on Tuesday signed into law a bill to fully insure manat deposits that pay no more than 12 percent annually. Only dollar deposits paying 3 percent or less a year will be fully guaranteed under the amended law.

Rate Path

The latest rate increase means the cost of borrowing has already more than doubled this year. Before February, Azerbaijan kept rates on hold after last cutting its benchmark to 3 percent in July 2015 amid efforts to diversify the economy away from oil and natural gas.

Azerbaijan will probably continue with rate increases as it seeks to curb inflation and make manat assets more attractive to investors, according to Samir Aliyev, an analyst at the Center to Support Economic Initiatives, a Baku-based research group. A weaker currency has touched off inflation, with Standard & Poor’s predicting annual price growth at 15 percent in 2016, compared with an average of 2 percent in 2012-2015.

“This is a classic defense against the weakening exchange rate,” said Timothy Ash, head of emerging-market strategy at Nomura International Plc in London. “The currency likely needs to weaken more.”

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