NBG Keeps Its Policy Rate unchanged at 8.0%
03 February, 2016
The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on February 3, 2016 and decided to keep the refinancing rate at 8.0 percent.
The monetary policy decision is based on the macroeconomic forecast, according to which the tightening of monetary policy by the National Bank of Georgia during 2015 on the one hand will be reflected in the reduced inflation expectations as well as it will weaken inflationary pressure through constraining the aggregate demand. According to the current forecast, in the beginning of 2016 the inflation rate will slightly exceed inflation target; it will decline below 5 percent afterwards, although will remain close to target.
The y-o-y growth of consumer prices is 5.6% in January. The main factors of inflation are stemming from the supply side, namely the increase in the intermediate costs of production due to exchange rate depreciation and higher prices on certain imported goods. An important impact on the inflation came from the one-time increase in the electricity tariff. The rise in inflation has been limited by the weak aggregate demand and decrease in the world prices of oil and food products.
The real GDP growth in the second quarter was consistent with the forecasts. According to preliminary estimates the real growth in 2015 was 2.8%. The factor hindering the growth is the external sector, which, given the dire economic situation in the region negatively affects the income from exports of goods and services. The economic growth in the past period was mostly driven by domestic demand, although the demand is negatively affected by the decline in remittances and increase in the debt service of foreign currency denominated loans due to the changes in the GEL/USD exchange rate.
There have been some positive developments in relation to the elimination of external imbalance. Given the decrease in foreign currency inflows the change in the exchange rate has caused import to adjust. In 2015 the import has decreased by 15.3 percent (excluding the one-offs). Accordingly based on our judgment the impact of the external shock on the exchange rate has been exhausted. Other things equal no additional pressure can be expected on the exchange rate coming from the existing external shock.
The tightening of the monetary policy in 2015 is partly reflected to the economy. Interest rates on lari denominated loans increased and as a result the growth of credit portfolio declined. This will be weakening aggregate demand further and will push inflation downwards. Thus, at this stage, there is no need for additional monetary tightening to contain inflation expectations, unless more shocks take place. Accordingly, taking into account external risks and domestic factors, the MPC finds it appropriate to leave the policy rate unchanged at 8.0 percent. Further changes in monetary policy will depend on the inflation forecast and factors affecting it, global and regional economic environment and general economic conditions.
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 March 9, 2016.
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