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National Bank cuts key interest of Azerbaijan rate to 10%

31 October 2008 08:15 (UTC +04:00)

The central bank said in a statement that the foreign exchange surplus increased to remarkable extent and the countryâ€™s creditor (asset) position further strengthened in financial relation with the global economy.
â€œIn such circumstances, the stability of the banking system was reliably protected from the impact of foreign crises. Meanwhile, regression and deflation trends strengthened in the global economy. The economic growth started to decline in the advanced economies and liquidity crisis is still continuing. In this situation, central banks have resorted to an influential package of measures to protect financial stability.
In addition, the central bank and the government work closely in order to more reliably protect financial stability in the banking system and preventively neutralize foreign risk factors. These measures include integrated prudential regulation for higher resilience against external economic crisis and for higher flexibility of liquidity instruments,â€ said the statement.
The key rate cut is aimed at loosening monetary policy. That is to say, easing monetary policy is needed and this shows that there are problems emerging in the banking system. Despite the restriction of consumer lending, commercial banks were faced with a liquidity problem, as proved by the sharp decline in repo transactions and an increase in the centralized credit market.
Thus, the central bank helps banks to solve the problem of liquidity, by making funds cheaper and reducing reserves.
At the same time, it should be noted that the external debts owned by Azerbaijan-based banks stood at AZN 1 598.3 million, a historical high level. This poses a serious threat to the national banking system, given the likelihood of bankruptcies of major financial institutions.
So, the decision to abolish the reserve requirements would be more profitable for banks than cutting key rates. In general, the credit market is be expected to intensify after the rates were lowered, otherwise, this step would be futile, and the rate cut would remain a theoretical figure playing no role in the rehabilitation of the banking system.
By the way, on October 14, the central bank cut the key rates to 12% from 15%, reducing the interest rate ceiling to 17% from 20% and leaving the interest rate floor unchanged to narrow the corridor.