NBG Reduces Its Policy Rate by 50 basis points to 7.5%
27 April, 2016
The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on April 27, 2016 and decided to reduce the refinancing rate by 50 basis points to 7.5 percent.
The monetary policy decision is based on the macroeconomic forecast, which confirms that the tightening of the monetary policy by the NBG throughout 2015 reflected positively on the decrease in inflation expectations. According to the current forecast the annual inflation will decrease at a moderate rate in the coming quarters, temporarily keeping below the current target value and will reach the latter by the end of the year. The decrease in the inflation forecast was to a significant extent due to the drop in inflation expectations.
The annual inflation in March dropped to 4.1% (compared to 5.6% in February). This decrease in the annual inflation was largely due to the expiration of base effects coming from one-time factors and decrease in inflation expectations.
According to the current NBG forecasts the economic growth in 2016 will be around 3.0%. Recently factors like increased investment activity, particularly in construction, have had positive effect on the economic growth. This trend is expected to continue this year. However increased interest rates on Lari-denominated loans and the overall decline in the credit portfolio growth rates weakens the aggregate demand. Another factor keeping the economic growth low is the negative impact of the economic situation in Georgia’s trade partners, reflected in the decrease of remittances and weakening of external demand.
Based on the aforementioned the Monetary Policy Committee considers necessary to start phasing out the tight monetary policy, which means the gradual reduction of the refinancing rate down to the neutral level in the medium-term. According to the NBG estimations the neutral policy rate in the medium term is around 5-6 percent. Therefore the Committee decided to reduce the policy rate by 50 basis points. The rate of further monetary policy softening will depend on the revised inflation forecasts.
At the same time in order to encourage the attraction of funds in GEL the Monetary Policy Committee decided to reduce the minimum reserve requirement on the attracted funds in GEL from 10% to 7%. At the same time, in order to mitigate potential risks affecting the financial stability the minimum reserve requirement on the funds attracted in foreign currency has been increased from 15% to 20%.
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 June 15, 2016.