The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on April 25, 2012 and decided to lower its Main Policy Rate (the refinancing rate) by 25 basis points to 6.25 percent.

In the first quarter of the year the economic activity indicators pointed at high growth. Despite the latter the output gap is equal to zero, which indicates the absence of demand side inflationary pressures.

The annual price change in March equaled -2.2%, the negative value of inflation mostly due to the base effect. In spite of the volatility of the consumer price index, prices are stable in the medium run. Namely, the core inflation (net of food and energy prices) has been mostly stable during recent years and was equal to 2%.

The inflation forecast hasn’t changed since the last MPC meeting. According to current prognosis, given the unchanged policy stance, inflation will remain low during this year and is expected to reach its target value by the beginning of the next year.

Since the beginning of the year the banking system operated under the conditions of excess liquidity. As a result the interest rates on the short-term interbank market have decreased and drifted away from the policy rate, consequently causing the decrease in longer-term rates. Such interest rate decrease is effectively equal to policy easing. In the recent weeks the excess liquidity in the banking system has decreased, causing the increase in the interbank market interest rates, which under the current conditions might have an undesirable effect on the economy. Hence, it is reasonable to reduce the policy rate.

At the same time the accumulation of the excess liquidity in the banking system increased the volatility of the interbank market interest rates. In order to reduce this volatility and increase the efficiency of the monetary policy the National Bank considers the possibility of selling the government securities, in order to sterilize the excess liquidity in the money market.

The NBG will continue to monitor the developments in the economy and financial markets and will act accordingly.

The next meeting of the Monetary Policy Committee will be held on May 23, 2012.