According to the decision of the National Bank of Georgia (NBG), the interest rate on loans in Georgia has been reduced by several tens of thousands. The Monetary Policy Committee discussed the reduction of the refinancing rate by 0.25% at the meeting of 24th of June. The monetary policy rate was set at 8.25%.
Refinancing rate reduced by 0.25%
By Natalia Kochiashvili
Thursday, June 25
In May, annual inflation was 6.5 percent. The NBG predicts that inflation will continue to decline for the rest of the year and will reach its target level in the first half of 2021. This has led to an increase in the cost of providing services. However, this has only a short-term effect on inflation. Maintaining inflation above the target for a long time carries risks of increasing inflationary expectations and that’s why abovementioned decision was taken.
“Despite the decline, monetary policy remains tight, which will bring inflation back to target in the medium term. The pace of further normalization of monetary policy will depend on how quickly inflation expectations are reduced,” NBG said in a statement.
Information on loans related to refinancing rates is in the loan agreement. Citizens can also get information about this detail by communicating with the bank.
In explaining the reasons for this decision, the National Bank focuses on the current and forecast inflation indicators.
Preliminary indicators give mixed signals regarding the expected reduction in aggregate demand. According to current estimates, economic activity in April fell by 16.6% year on year. At the same time, the volume of transactions with payment cards increased by 21% in May compared to the previous month, although the annual growth rate is still negative. On the other hand, there is a high annual growth of cash in circulation, which indicates the intensification of economic activity. At the same time, in the wake of the gradual lifting of restrictions, some improvement in credit activity has been observed.
Overall, NBG’s statement explains that these factors mean that there is considerable uncertainty about the scale of the expected decline in aggregate demand. In addition, significant fiscal stimulus is expected to have a positive effect on aggregate demand for the remainder of the year. Among them, the planned partial subsidy of the interest rate on mortgage loans. The latter is tantamount to further softening monetary policy.
Recall that Prime Minister Giorgi Gakharia presented the real estate support program on 28th of May. The budget for the mortgage subsidy program will be GEL70 million and the co-financing of loans under it will last for 5 years.
The state will subsidize 4% interest rate on mortgage loans, subsidies are issued on loans not exceeding GEL200,000 and lasts for 5 years after taking the loan; the state stops subsidy if the refinancing rate falls below 5% (refreshes or exceeds); Program applies only to those who will take out a mortgage loan from June 2020 till January 2021 to buy a newly built apartment;
The state will also issue a loan guarantee in the amount of 20% of the loan for 5 years after taking the loan; All borrowers who receive a loan (June 2020-January 2021)of no more than GEL200,000 to purchase a newly built apartment will receive a guarantee, which will be extended to loans where the share is at least 10%. Budget of this program is GEL14 million.
According to forecasts, as a result of the economic downturn in trading partner countries, foreign demand will remain significantly weakened throughout the year. According to preliminary data, exports of goods in May decreased by 31 % annually, while revenues from international travelers decreased by 97%. With the decline in export revenues, imports in May fell by 34% year on year.
Recall that at the beginning of this year, the refinancing rate was 9% and it was reduced to 8.5%, and this time to 8.25%.
The NBG claims it will monitor the current economic processes and financial markets in the future and will use all the tools at its disposal to ensure price stability.
The next meeting of the Monetary Policy Committee will be held on August 5, 2020.
"Society and Banks" reviewed loans related to variable interest rates. According to them, as of 1stof May, 119,200 loans have been issued at variable interest rates, and the vast majority of them are tied to refinancing rates. At present, GEL6140.55 million loans has been issued at the variable interest rate.
Out of 119,200 contracts, 34,200 are consumer loans and that make up GEL834.11 million.
Quantitatively in the first place are loans secured by real estate. 44,400 loans were tied at the refinancing rate, averaging 11.25%. The total portfolio is GEL1923.31 million.
36,700 contracts have been signed for business loans. The total portfolio is GEL3142.34 million. Of these, banks issued GEL1099.30 million to finance small and medium-sized businesses, averaging 13.70%. And big business was credited with GEL2043.04 million, with a weighted average of 12.02%.
The smallest amount is a car loan tied to the refinancing rate. A total of 800 contracts were signed. GEL15.882 thousand was borrowed by banks at an average of 16%. Also, 3,000 variable interest rate loans have been issued, the specific purpose of which is unknown. The total volume of these loans is GEL81.25 million.
Loans at variable interest rates as of May 1 accounted for 42.83% of the total loan portfolio issued in Lari. Most of them are business loans, while the lowest interest rates are on mortgages.
“As of May 1, both the loan portfolio and the number of contracts have been reduced. The interest rate has been increased from 12.88 to 13.49 on consumer loans and from 12.32 to 16 on car loans,” the organization explains.
According to the Society and Banks, the decision of the National Bank's Monetary Policy Committee is cautious, since, as NBG also noted, inflationary pressures have eased and will return to target levels early next year. “One of the important factors in the decline may be the further softening of monetary policy. In the post-pandemic period, economic activity has declined significantly and the timeliness of monetary stimulus plays an important role in the rapid recovery of the economy,” says the organisation.
As for the discussion of fiscal incentives (partial subsidies for mortgage loans) in the role of monetary policy, Society and Banks consider it to be wrong and ‘it cannot have a large-scale impact on aggregate demand because it concerns a particular narrow segment and its lag time is unclear.’
“It is desirable for the NBG to reduce the monetary policy rate more sharply in the next sessions, which on the one hand will directly affect lending and on the other hand will raise positive expectations, as reducing the monetary policy rate is a signal of reduced investment risks,” they said.