Baku, Azerbaijan, Sept. 14
By Anvar Mammadov - Trend:
The possible decision of the US Federal Reserve System (FED) to raise the interest rate will not have a direct impact on the Azerbaijani manat, expert economist, Doctor of Economic Sciences Muslim Ibrahimov told Trend Sept. 14.
The expert said the increase in the discount rate in the US can only indirectly affect the stability of the national currency of Azerbaijan.
"First of all, the increase will affect Russia and Turkey, with whom we have established close trade relations. The national currencies of these countries may become cheaper. Therefore, there is a danger of indirect influence on the Azerbaijani manat and a slight fluctuation in its rate of exchange. In addition, the FED's decision may affect inflation, so it is necessary to conduct a somewhat tight monetary policy to contain it. It is not unthinkable that the Central Bank of Azerbaijan may raise the interest rate, but it will be only a pre-emptive step that will not have a strong impact on the overall macroeconomic situation in the country," Ibrahimov said.
The expert believes that during the next meeting of the FED, people should expect an increase in the key interest rate, as, firstly, at the beginning of the year it was already announced that the regulator will raise the rate several times during 2018.
"Secondly, if we take into account that in the US the macroeconomic policy is formed on the basis of the FED's independence from the government, the regulator will proceed from the situation on the current day," he said.
"The situation is that today the macroeconomic indicators are quite positive. But there is a problem with the public debt, which accounts for 107-108 percent of the country's GDP. In order to solve this problem, it is necessary, first of all, to increase economic growth. The solution to this problem is seen in increasing industrial production in the United States, due to the same sanctions and increase in customs duties. On the other hand, as soon as the duties on foreign goods increase, the demand for these goods within the country will also increase. To prevent this, it is necessary to develop domestic production, which in turn will increase the debt again," the expert believes.
Ibrahimov noted that the increase in economic growth rate also increases inflation.
"To prevent inflation, the FED raises the discount rate, which hinders economic growth. This, in turn, does not suit US President Donald Tump, whose policy is aimed at increasing the rate of economic growth. Trump's policy is aimed at solving a perennial problem where the average American consumes more than he/she produces, which translates into an increase in the total US debt, which is projected to reach 127 percent of GDP in a few years. Therefore, the regulator has to maneuver between ensuring economic growth and preventing inflation," the expert said.
The last meeting of the US FED’s Federal Open Market Committee was held on August 1, 2018. Then the Federal Reserve System kept the base rate unchanged - at the level of two percent. Earlier, following the meeting on June 12-13, the rate was increased by 0.25 percentage points - from 1.5-1.75 percent to 1.75-2 percent per annum. In March 2018, the rate was also raised by 0.25 percentage points.
In 2017, the regulator raised the rate three times. Prior to that, the pace of rate increase was slower — once in 2016 and 2015 each. In 2007-2008, the regulator gradually lowered the rate until it reached a minimum level of 0-0.25 percent in December 2008.
The next meeting of the regulator will be held on September 25-26. Most analysts predict a rate hike to 2-2.25 percent during the upcoming meeting.