Azerbaijan Raises Rates to Highest Since 2008 as Currency Wilts

The Azeri central bank raised its key interest rate for the third time this year to the highest since 2008 as it struggles to restore trust in the national currency after two devaluations in 2015.

The benchmark was increased to 9.5 percent from 7 percent, effective on Aug. 8, according to an e-mailed statement on Friday. The upper and lower ends of the central bank’s rate corridor were left unchanged.

The move aims to “strengthen trust” in the manat and encourage savings in the currency, while also making the central bank’s sterilization operations more attractive to lenders, policy makers said.

The central bank burned through more than two-thirds of its reserves to defend the manat last year before loosening the reins on the exchange rate after crude prices collapsed. As oil fell into a bear market this week, the currency of the third-largest crude producer in the former Soviet Union is coming under more pressure, with the manat heading for its eighth decline against the dollar in the past 10 weeks.

The Azeri currency is the fifth-worst performer globally against the dollar this quarter after depreciating by almost 5 percent. It traded 1.2 percent stronger on Friday at 4:40 p.m. in the capital, Baku. The manat suffered the biggest drop among all currencies last year when it lost about half its value against the dollar, according to data compiled by Bloomberg.

While Azerbaijan’s sovereign wealth fund known as Sofaz offers $100 million a week to meet demand for dollars, the central bank started deposit auctions for the first time in June to soak up manat, paying lenders to place funds on short-term accounts.

‘Materially Worse’

Azerbaijan’s economic performance has so far been “materially worse” than anticipated, S&P Global Ratings said last week as it cut the nation’s credit-rating outlook to negative from stable. The company lowered its forecast for gross domestic product to a decline of 3 percent in 2016 and predicted it will rebound by about the same amount next year.

The hydrocarbons industry represents about 40 percent of Azeri GDP and close to 95 percent of its exports, S&P estimates.

With the share of dollar savings at almost 80 percent of the total, the central bank’s attempts to influence domestic monetary conditions are “severely” limited, S&P said. 

“Apart from setting the country’s foreign-exchange regime and undertaking interventions, the central bank’s ability to influence economic developments remains considerably constrained.”