The unexpected appreciation of the Azerbaijani manat in February has sent banks into a dollar-selling frenzy, sources in Baku have informed bne IntelliNews. In the past week, the manat has appreciated by 9.9% against the dollar, in contrast to its 13% depreciation in 2016 and 8.4% depreciation in January.

It is unclear how the manat, which was ostensibly floated in January and is currently trading freely, could have appreciated so much so quickly. Experts interviewed by Turan news agency point to the fact that the appreciation is speculative. Furthermore, sources have informed bne IntelliNews that lenders expect the currency to return to its gradual depreciation.

The central bank decided to drop the manat's peg to the dollar in February 2015, after spending 70% of its gross international reserves, or $11bn, on unsuccessful attempts at bolstering the currency. Between February 2015 and January 2017, the manat was maintained through a controlled flotation. However, in January, the regulator announced that it would allow the markets to decide the currency's value.

Azerbaijan's sovereign wealth fund Sofaz has been helping the central bank to meet demand for foreign currency from lenders - and thus restore confidence in the manat - since January 2016. The fund spent over $5bn on biweekly foreign currency auctions in 2016, and will continue to participate in them this year.

The manat's depreciation in 2015-2016 resulted in double-digit inflation for consumer products, which Baku has pledged it will seek to contain to single digits in 2017. In December alone, the prices of foodstuffs increased by 21% y/y.

Since early 2015, many Azerbaijanis have converted their savings into dollars. The rate of dollarisation of deposits is believed to exceed 80%, and that of loans 60%. If the appreciation continues, Azerbaijanis will likely rush to convert their savings back into the local currency.