UPDATE 1-Azerbaijan drops FX rate corridor to float manat currency -

(Adds details, analyst’s comment, background)

BAKU, Jan 12 (Reuters) - Azerbaijan has dropped an exchange rate corridor and let the country’s manat currency float freely, the central bank said on Thursday, in a move to save state reserves from depleting.

The central bank said it scrapped a requirement for commercial banks to buy or sell manat at a range of no more than 4 percent from the officially set exchange rate.

The move to let the market to set its own exchange rate comes amid recovery in prices for crude, the main source of income for the former Soviet republic. Expectations that the global oil glut will gradually disappear later this year support the timing of the move.

The central bank’s decision is likely to send the currency to fresh lows but, in the longer term, it should bode well for its stabilisation, analysts say.

The manat may stage some “overshooting”, weakening beyond fundamentally justified levels against the dollar in what would be the market’s initial reaction to the central bank’s step, said Yaroslav Lissovolik, chief economist with the Eurasian Development Bank in Moscow.

“After being kept in the corridor, the manat could have been overvalued and had accumulated some potential for weakening. External conditions, however, may keep it from excessive easing,” Lissovolik said.

The central bank set the manat’s official rate at its weakest ever of 1.7867 after announcing the decision to scrap the corridor. Banks in Azeri capital Baku were selling the dollar even higher, saying they were aware of the range removal in advance.

“We knew about this decision a year or year-and-a-half ago. It seems they’ve decided that it would be better to do it in the beginning of the year,” a manager at commercial bank ASB bank, who asked not to be named, told Reuters.

ASB Bank stood ready to buy dollars at 1.82 manats and sell the U.S. currency at 1.87. Before the central bank’s decree, the bank was selling dollars at 1.84 manats.

While opening the door for some depreciation, the removal of the corridor may also ease currency conversion restrictions.

“The bank had been selling maximum $200 per person before 12.00 (midday in Baku). But it had changed that to $5,000 per person now,” a security officer at Access Bank told Reuters.

The withdrawal of the manat’s exchange rate corridor is yet another step to respond to a painful drop in oil prices that began in 2014.

Since 2014, when the oil prices collapse began, the manat lost 56 percent of its value after being pegged to around 0.78 versus the greenback for several years.

Azeri central bank also said on Thursday it was changing rules of currency auctions and said it would be announcing the amount of foreign currency that it was to sell in advance.

It was unclear if authorities may still intervene in the market to affect the manat rate as the central bank had to switch to a managed float and stopped spending reserves nearly a year ago. Since then the manat was supported by the Azeri state oil fund SOFAZ that converted dollar revenues.

The central bank, however, said late last year it had been aiming at letting its currency float freely in 2017. (Writing by Alexander Winning, Maria Kiselyova and Margarita Antidze; editing by Andrey Ostroukh/Jeremy Gaunt)