NBG Keeps Its Policy Rate unchanged at 4%

NBG Keeps Its Policy Rate unchanged at 4%

13 August, 2014

The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on August 13, 2014, and decided to keep the refinancing rate unchanged at 4%.

At its February meeting, the MPC decided to start a gradual exit from the accommodative monetary policy. The speed of this process will depend on both the rate of the revival of economic activity and aggregate demand. However, since February, certain risks have materialized that have caused insufficient growth of both domestic and external demand, thus slowing down the process of inflation reaching its medium term target.

The NBG still considers an exit from the accommodative monetary policy necessary. However, recent forecasts suggest that the process will take more time than originally predicted. In order to ensure that inflation reaches its target in the medium term, the committee has thus decided to keep the policy rate unchanged at this stage. 

It should be taken into account that exiting the accommodative monetary policy will not have a limiting effect on the economy, insofar as the policy rate will remain below the neutral level. So long as new information revealed in coming periods does not affect the current forecasts and no new shocks to the economy materialize, the policy rate, along with the revival of economic growth, will gradually approach its neutral level and reach 6% by the end of 2015.

According to the NBG forecasts, inflation will gradually reach 4% by the end of 2014, and will reach its target value of 5% in the first half of 2015. Annual inflation in July 2014 was slightly lower than expected at 2.8%.

Real GDP growth in the first half of the year was 6%, and was mostly driven by domestic demand. External demand still remains weak, as indicated by low goods export figures in July. Given the present situation in the region, external demand still remains a risk factor. In the event of a further decrease, this will push down both economic growth and inflation.

The NBG will continue to monitor developments in the economy and financial markets, both domestically and abroad, and will use all means and instruments at its disposal to ensure price stability. The dynamics of further monetary policy changes will depend on the dynamics of expected inflation, tendencies of economic growth, and the global and regional economic environment.

The next meeting of the Monetary Policy Committee will be held on September 24, 2014.