The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on October 26, 2016 and decided to keep the refinancing rate unchanged at 6.5 percent.
According to the macroeconomic forecast, weak aggregate demand and lower inflation expectations indicate the need to decrease the monetary policy rate to its neutral value in the medium term. However, the reduction in the policy rate implemented in the previous periods has not completely passed on to the economy, so it is expedient to implement the normalization policy in a gradual manner. According to the current forecast, other things equal, the monetary policy rate may be expected to decrease to 6% in the coming two quarters.
According to the current forecast the inflation will reach its target in the second half of 2017. The annual CPI inflation in September dropped to 0.1%. This drop is due to the weak aggregate demand, decrease in expectations and decline in commodity prices on world markets. At the same time the significant decrease in inflation since the beginning of the year was to a great extent caused by the base effect.
The impact of the external shocks on the Georgian economy has weakened. The rate of decline in the registered goods exports has gradually decreased, and exports growth rate in September became positive, contributing to the improvement in the trade balance. Positive trends are maintained in the exports of services, namely in tourism; Increase in the number of tourists have translated into higher tourism revenues.
The increase in confidence in monetary policy instruments caused the demand on GEL-denominated floating interest rate loans to grow; this, in turn, fostered the improvements in the monetary policy transmission mechanism, thus stimulating aggregate demand and the economy in general. Improvements in monetary policy transmission mechanism create an additional monetary policy easing effect under prevailing interest rates. Therefore the National Bank of Georgia deemed appropriate at this stage to keep the policy rate unchanged.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal in order to ensure the price stability.
The next meeting of the Monetary Policy Committee will be held on December 14, 2016.