Hoffman is absolutely right. I guess somebody has been reading my blog! I was among the first ones to notice the failure of proper transmission from our devaluation shock to deposit interest rates. Going back 4 months ago, I wrote:
"...because the USD deposit rate is too high, there is an 8.3% annual [pseudo] arbitrage profit on the table. In order to eliminate the arbitrage, banks need to bring down the USD deposit rate to 2.6%, but it’s currently 11%... [to switch to USD deposits] is a perfectly rational decision to make for any concrete individual. But collectively, if every Manat holder will pursue the same dominant strategy, this is a stupid trust-destroying public disaster." [emphasis added now]I acknowledge that there are difficulties for any particular single bank to move interest rates up or down substantially. Some of us researched this thing a while ago.
"...a considerably incomplete pass-through is present in the case of all banks, the finding consistent with a non-competitive banking sector. The average pass-through effect is 25% and the average period of adjustment is 5 months. Sectoral analysis reveals that pass-through is the strongest for industrial loans and the lowest for consumer loans, suggesting that banks exert more monopolistic pricing powers on consumers while hedging against risks associated with industrial lending."But there are multiple strategies that banks can implement collectively to move rates in any direction. We are a very, very small market. It should not be rocket science to manage it.
The bigger point to the story is much more depressing. Nobody among serious policy-makers and bankers in Azerbaijan actually reads research papers or informative blog posts that our very own Azerbaijani economists write. I am sort of getting used to it.