Friday, March 4, 2016

Azerbaijan raises rate another 200 bps as inflation soars

    Azerbaijan's central bank raised its benchmark refinancing rate by a further 200 basis points to 7.0 percent, citing the need for sustained macroeconomic stability, further development of its financial markets and to promote a wider use of the national currency, the manat.
    The Central Bank of the Republic of Azerbaijan (CBA) has now raised its rate by 400 basis points the year following a similar-size rate hike in February.
    The inflation rate of Azerbaijan - located west of the Caspian Sea, north of Iran and south of Russia - rocketed to 13.6 percent in January from 4.0 percent in December.
    In addition to raising the benchmark rate, the CBA also increased the upper limit of its interest rate corridor to 17 percent from a previous 10 percent while the lower limit was maintained at 2 percent.  The duration of liquidity provision at those rates was also being extended from one to seven days.
    Hit by the fall in crude oil prices, Azerbaijan has seen heavy pressure on its manat, with local depositors switching into U.S. dollars. Oil and gas account for 95 percent of the country's exports and 75 percent of government revenue.
    The CBA said today's hike should allow banks to offer higher rates for manat deposit and higher yielding local currency bonds.
    From 2011 to early last year, the CBA effectively pegged its manat to the dollar but had to draw heavily on reserves to defend the peg as the fall in crude oil prices dampened economic activity.
    In February 2015 the CBA then abandoned the peg in favor of a dollar-euro basket and shortly afterwards devalued the manat by 33.5 percent against the dollar and 30 percent against the euro, with the exchange rate set at 1.05 to the dollar.
    But on Dec. 21, 2015, the CBA shifted to a floating exchange rate regime and has continued to sell U.S. dollars in auctions this year to satisfy demand for dollars that is estimated to account for up to 75 percent of all deposits.
    Pressure on the manat has continued this year, with it ending the week at 1.63 to the dollar, down 4.3 percent since the start of this year.



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