The benchmark will rise to 5 percent from 3 percent as of Monday to encourage savings in the manat, the Baku-based regulator said in an e-mailed statement. The move also intends to help "improve monetary-policy tools,” it said. The upper end of the central bank’s rate corridor was increased to 10 percent from 5 percent, while the lower limit was kept at 2 percent.

Policy makers in the third-biggest ex-Soviet oil exporter are turning to higher borrowing costs to support the manat days after President Ilham Aliyev refused to sign into law a bill imposing partial capital controls. The tumble in the currency, which lost more than 50 percent against the dollar in two devaluations last year, is touching off inflation, with Standard & Poor’s predicting annual price growth at 15 percent in 2016, compared with an average of 2 percent in 2012-2015.

The currency turmoil has prompted an exodus by savers from accounts in the manat, putting more pressure on banks and the foreign-exchange market. In Azerbaijan, the share of dollar deposits is estimated at as high as 75 percent, according to Fitch Ratings. The central bank shifted to a free float in December after burning through more than half of its reserves last year.

"Through the rate increase, the central bank seeks to curb inflation,” said Samir Aliyev, an analyst at the Center for Support to Economic Initiatives, a Baku-based research group. "This is also part of the policy to increase confidence in the manat.”

Pressure on the currency market has eased in February. The manat is the best performer this month among its ex-Soviet peers with a 4.2 percent gain against the dollar, according to data compiled by Bloomberg.

Azerbaijan hasn’t changed interest rates since its benchmark was cut to 3 percent from 3.5 percent last July to help diversify the economy away from oil and natural gas.

The central bank said the manat strengthened against the dollar in recent weeks as demand for the U.S. currency fell. While the central bank offered $200 million in an auction on Monday, total demand by 10 lenders was $32.1 million, it said.

The central bank said it will keep a close eye on macro-economic developments and "promptly react” to the situation in the currency market using its monetary policy tools.

 

(Bloomberg)