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How will FED increasing interest rates affect manat and the oil?

How will FED increasing interest rates affect manat and the oil?
Experts say although it won’t directly impact manat, it will influence oil prices

The Federal Reserves System of the USA increased the interest rates by 0.25% bringing it up to the range of 0.75-1%. The FED last changed the interest rates on December 14. There were no changes made in the following meetings. After the interest rates hikes, it is expected that the rate of the USD will also rise.

But there hasn’t been any increase in the rate of USD so far and it has remained the same since FED announced its decision. But how will this affect us? What kind of changes can we expect in the Manat rates and the oil prices?


We should note that Leyla Yusifzadeh, head of Analysis of Financial Sector and Market of Research and Development Center under CBA, stated during the VI annual Baku conference of "Fitch” international rating agency that this change would not impact the monetary policy of the Central Bank of Azerbaijan. APA reports that, the decision of the FED may indirectly affect us: "But this influence will be in the form of psychological pressure. If the oil prices change significantly, the monetary policy can change too. Insignificant fluctuations in the oil prices will not affect the fiscal policy and the State Oil Foundation spendings. But I don’t think the recent decision of the FED will have no consequences”.


According to financial markets expert Jafar Ibrahimli, this recent hikes will not put pressure on manat: "My opinion on FED’s decisions has not changed much in the last two years. We had stated that FED’s interest rates announcement would not immediately put pressue on manat. But we think this decision may affect the currencies of the trade partners of Azerbaijan which might later pressure manat too. Manat rates depends more on the interest rates of the CBA, volume of manat, budget policy and the balance between oil prices and payments. In short, the rate of manat is more dependent on the fundamental problems of Azerbaijani economy than FED’s decision”.


Ibrahimli noted that if the economic activity in the USA falls under after the interest hikes, then it might lead to oil prices to fall. We should also consider the fact that the USA is increasing its oil production.

Ilham Shaban, head of "Oil Research Center”, said the changes would affect the oil prices but not significantly: "I think it will have an effect in th coming days. In any case, these events always have an impact on the stock exchange. Only then there will be adjustments according to the situation in the markets. Because interest rates hikes always affect the raw materials market. For some time, it is reflected in the stock prices in the markets. It happened in December and before that. Sometimes it is reflected for a week, sometimes two. But later, the prices are adjusted in accordance with supply and demand. So, I don’t expect the interest rates increase to significantly drop the oil prices and that have a lethal affect on the markets”.


Perviz Heydarov, chief researcher at Economic Reforms Scientific Research Institute under the Ministry of Economy, thinks FED rising the interest rates will have no effect on manat rates whatsoever: " The real situation of the currency market of our country is that the manat rates have stabilized after a long time. Certain factors have played a role in this. Firstly, the external factors such as oil prices as well as the slowing devaluation preocess in our foreign trade partners have decresead the pressure. Secondly, the government have declared austerity in all directions and changed the current budget-tax policies. And thirdly, monetary-credit policy in the country have become harsher. The mechanism of foreign currency exchange has been improved and transformed into a completely new shape and lastly, as the dollarization process has reached its peak in the country, the demand for dollar has fallen to minimum. It can only have a psychological affect and even that would be insignificant compared to the previous ones. Banks have large dollar reserves and very little manat. Import is not in the same volume as before. Because firstly, the purchasing power is not as high as before and efficienty has fallen and the risk factors risen. Business activity is as good as "dead”. Therefore, the manat will not become cheaper”.


According to Heydarov, FED’s decision can only have one negative result, the oil prices may fall: "If the oil price falls as low as 40 dollar, it would be dangerous for countries on whose export the state revenues depends on. Even the USA is not ready for this. This move is calculated for American economy”.


Economist Vugar Bayramov pointed out that despite the FED’s interest rates hike, the manat is gaining value: "For the first time in the recent years, FED’s decision did not increase the demand for dollar in our foreign currency market. Despite the fact that March is a month full of holidays, the demand for import is balanced by supply of the foreign currency by the market. Weak participation by the International Bank in the auctions also help regulate the demand for hollar. Practically, the International Bank of Azerbaijan is the only bank that can have an impact on the demand in the foreign currency market. Passive position of the said bank in the currency market prevents the demand for dollar to be increased and as a result, manat strenghtens. On the other hand, one of the main conditions for the manat to strenghten is for citizens to exchange their foreign currencies for manat. Of course, optimization of the infrastructure spendings against the background of diminishing manat reserves directly impacts the rates as well. Strenghtening of manat rates is very favorable economically and socially. The most important thing is to achieve stability in the rates”.


How can manat rates change from now on? Under what scenario would the manat rate strengthen? The economist think that the Central Bank will not auction the 7.5 billion manat transferred from the State Oil Foundation. The main bank optimizes the demand for dollar using other tools. If the said resources are utilized to revitalize the International Bank, then the International Bank will participate less and less in the upcoming auctions. In this case, it will be a lot easier for the Central Bank to maintain the current rate of manat: "Because it would mean that the demand for foreign currency of one of the main buyers in the auctions will be supplied externally. If this scenario is realized, then it will be possible to achieve stability in manat rates. We should, of course, not forget the factors such as manat reserves, minimalization of the import, budget consolidation, the prices of oil in the world markets. It’s clear that, as the budget spending on infrastructure increases, the manat reserves will increase and demand for import rise and it will become necessary to regulate the process by auctioning more money”.

Under what circumstances would the demand for dollar increase?

According to Bayramov, in the countries that pursue liberal currency rates policies, the national currency usually finds its value in the markets in the first 6 months. This means that if the similar practice is repeated in our country, the market value of the manat will be achieved in the first half od 2017: "This might reduce the volatility of the national currency rates. This should be the main goal of the Central Bank. Because only after this it is possible to start the process of reverse-dollarization. It’s important to gradually expand the manat reserves and restore the economic activity along with the reverse-dollarization process”.

Economist stated that increased circuliztion of volume of manat can re-shape the demand for dollar: "If the Central Bank stops sterilization of maant, and the budget infrastructure spendings rise and the activity of the International Bank in the market increases, it might lead to more demand for dollar. But it seems that the expansion of manat reserves is not on the agenda. General assesment allows us to conclude that it would be important for the Central Bank to use regulatory tools in the upcoming months. If we take the psychological effects in the market into account, we have more opportunities to prevent the manat rates from falling. Due to the reasons I mentioned above, manat has the psychological advantage”.


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