National Bank of Georgia increases refinancing rate to 7%

On September 4, 2019, the Monetary Policy Committee of the National Bank of Georgia (NBG) met and decided to raise the refinancing rate by 0.5 percentage points from 6.5% to 7%.

The regulator reports that in August, annual inflation rate stood at 4.9 percent.

“Overshooting the target was caused by several factors. One-off factors, such as increase in excise tax on cigarettes (contribution of 0.8 percentage points), remain one of the major contributors to high inflation. Moreover, the pass through of the exchange rate depreciation to inflation increased in recent periods. It should be noted that the core inflation which excludes food, energy and tobacco prices, is still low at 2.4 percent indicating that the demand-side pressure on inflation is low,” the statement said.

Moreover, the NBG says that the current depreciation of the nominal effective exchange rate is amplifying inflation expectations.

“Stating that if inflationary pressure driven by the exchange rate depreciation persisted, the Committee would consider monetary policy tightening, the Monetary Policy Committee decided to increase the policy rate by 0.5 percentage points. Moreover, the Committee stands ready to further continue policy tightening until the pressures from exchange rate recedes,” it said.

The statement also reads that according to preliminary indicators, export of goods increased considerably (12.4 percent) during January-July 2019. Remittance inflows increased moderately (7.8 percent) during the same period.

In addition, the National Bank said preliminary data indicated improved economic growth. Nevertheless, aggregate demand remains below the potential, partially offsetting pressures from exchange rate. According to the forecast, other things equal to the inflation will remain above the target during this year, will start to decline from March, 2020 and stay close to target in the medium term.

“Against the background of the ban on air travel from Russian Federation, revenues from international travelers declined in July, as expected. Overall, during January-July, this indicator grew by 2.1 percent as opposed to 7.0 percent in the first half of the year. Despite this, total inflows continue to grow and further reduction in the current account deficit is expected in 2019,” the NBG says.

The next meeting of the Monetary Policy Committee is scheduled on October 23, 2019.