BAKU, Azerbaijan, Nov.10
By Leman Zeynalova - Trend:
The increase by the Central Bank of the Republic of Azerbaijan of its refinancing rate is aimed at curbing inflation and, in such a way, may lead to some shifts in both corporate and households’ behavior, from spending towards saving, Olga Ulyanova Vice President-Senior Credit Officer, Financial Institutions Group, Moody's Investors Service told Trend, answering the question about the impact of higher oil prices on the banking sector.
The Management Board of the Central Bank of the Republic of Azerbaijan decided to set the refinancing rate at 7 percent, the floor of interest rate corridor at 6 percent and the ceiling at 8 percent.
The refinancing rate related decision was taken in light of lingering inflationary pressure in the economy, sustainability of the factors influencing it, rising prices in global markets, a high inflation rate in trade partners and rising inflation expectations.
Inflation has been rising in Azerbaijan since the last meeting of the Management Board dedicated to the monetary policy. According to official statistics, in September monthly inflation was 1.8 percent, and 12-month inflation was 8.5 percent. Average annual inflation was 5.2 percent in January-September. Average annual core inflation calculated by excluding swings in regulated prices and prices for seasonal agricultural products was 3.3 percent.
Ulyanova noted that for banks, the increase in refinancing rates may create stimulus for an increase in banks’ offered rates for deposits nominated in Azerbaijani manat, which, in turn, will incentivize some customers to save their money in local currency, rather than foreign currency.
“If this incentive achieves its goal, this would be positive for local banks whose balance sheet structures and profit-and-loss accounts are still under pressure of high dollarization. Indeed, approximately half of all customer deposits in Azeri banks are now in foreign currencies, predominantly US dollar. To match their asset-and-liability currency structures, banks have to lend intensively in US dollar, mainly to corporates, because foreign currency lending to individuals is prohibited. As a result, and despite some decline in the proportion of foreign currency loans in the recent couple of years, these loans still account for approximately one third of the sector total loan book, exposing both the banks and their borrowers to the risks of abrupt local currency devaluation. If the current move in refinancing rate curbs inflation and supports manat, this will ease the dollarization pressure for the banking sector,” she said.
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