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What Fed’s decision means for Azerbaijan’s manat

18 September 2015 [17:11] - TODAY.AZ

/By AzerNews/

By Gulgiz Dadashova

Fluctuations in the key interest rate by the Federal Reserve System are not the most significant factor affecting the change in the national currency of Azerbaijan, economy expert Farhad Amirbayov said, commenting on the possible effects on the manat.

The Fed decided not to raise its key interest rate in September. The rate was kept at a record low of 0-0.25 percent. The U.S. central bank hasn't raised rates in almost a decade and rates have been kept at near zero since the global financial crisis of 2008.

The exchange rate has a major impact on economies in other parts of the world, as countries with higher interest rates than the United States seek to attract more capital from abroad. Thus, for emerging markets, the Fed’s decision meant that outflows of capital from their economies into the United States stop.

“The Azerbaijani government forecasts the reduction of budget revenues and expenditures, and this year the government has to save and finance only urgent projects because of low oil prices on world markets. This is a more significant factor which impact on economic growth and thus may affect the currency,” he believes.

The oil factor still accounts for a large share in the Azerbaijani economy. The South Caucasus’s biggest economy and most populous nation of over 9 million people relies on oil for a bulk of the state revenue and 92 percent of export earnings.

Azerbaijan, whose energy-oriented economy faced challenges following oil price drop and Russia’s economic downturn, was forced to devaluate its currency in early February 2015 by over 30 percent.

“Even the oil factor is not so decisive as far as the state of public funds and the government's willingness to continue to replace private demand with the state demand. Due to insufficient private demand, we have been replacing it with state demand for years,” he told Trend.

Amirbayov noted that for years, economists had been expecting a rate rise. The fact that the rate has not been increased up until present is an indication that the global economic crisis is still not over, he explained.

The Federal Reserve declined to raise interest rates, citing concerns that the still fragile world economy may “restrain economic activity” and further drag down already low inflation.

The expert doesn’t expect a rise in the interest rate, “as the US economy did not record a significant and substantial improvement over these years”.

“If it [the improvement] did not take place, then the rate hike will increase the cost of service, not only of federal but also municipal, corporate and private debts of the United States. It is clear that the banks will index interest rates; as a result the debts of many credit instruments will increase. Therefore, I doubt that the Federal Reserve will increase interest rates in conditions of sluggish growth in both the US and the world economy,” he said.

The expert noted that the United States recently announced that the expectations of the country's economic growth did not materialize, and then revised the data to show lower indicators than previously stated.

"This is not a very positive fact, which shows the weakness of the US economy, so I do not think that the Fed will raise its key interest rate,” he concluded.

There was little reaction to the Fed’s decision, and the dollar index (the dollar to a basket of six currencies of countries - major trade partners of the United States) declined by 0.64% to 94.72 points, according to RIA Novosti.

The euro exchange rate against the dollar grew up to $1.1379 from $1.292 per euro. The dollar fell against the yen to 120.33 yen per dollar at 120.57 yen to the dollar on Tuesday.

The official exchange rate of the US dollar and euro to the Azerbaijani manat was set at 1.0477 manats and 1.1838 manats, respectively as of September 17.

URL: http://www.today.az/news/business/143833.html

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