On September 14, 2022, the Monetary Policy Committee of the National Bank of Georgia (NBG) decided to keep the monetary policy rate (the refinancing rate) unchanged. The monetary policy rate stands at 11.0 percent.

 

Inflationary pressure is still quite high both in Georgia and in the rest of the world. The sanctions imposed against Russia and the additional supply-side disruption stemming from the Russia-Ukraine war have significantly raised international prices on food, energy and other commodities. Besides this, against the backdrop of consecutive shocks, inflation has long deviated from the target level, which further amplifies inflationary risks. However, recently some positive trends are observed on international markets. Brent oil prices and shipping costs continue to decline. Although remaining at a high level, the international food price index decreased on a monthly basis by 9.0 percent in July, and by 1.9 percent in August, according to the Food and Agricultural Organization (FAO). It is expected that these trends will gradually be transmitted to the local market and favorably affecting the dynamics of inflation.

 

As in the previous month, headline inflation maintained its downward trajectory and reached 10.9 percent in August. Signs of inflation deceleration give reasons for cautious optimism. Overall, under the influence of these factors and the strengthening of the GEL effective exchange rate compared to the previous year, inflation will tend to decline further both this and next year and other things equal will gradually approach the target level from the middle of 2023. However, future trends largely depend on geopolitical outlook. Therefore, monetary policy will remain tight until upward risks to inflation expectations are sufficiently mitigated. Should inflation expectations rise further and/or demand-side pressures on prices exacerbate, further tightening of policy or maintaining the current tight stance for a longer time period might become necessary.

 

As for economic activity, according to the preliminary data, the average real GDP growth of the first seven months of 2022 was 10.3 percent. The main driver of this growth is a significant increase in tourism revenues. However, domestic demand is also strong, preventing a faster reduction in inflation. The strength of domestic demand is supported by a relatively high credit growth mainly caused by consumer and foreign currency loans, the slowdown of which can hardly be affected by increases in the monetary policy rate. Accordingly, in the recent period, along with the tightened monetary policy, the NBG used macroprudential instruments as well, which has already been reflected in the loan growth rate, and this effect will be strengthened in the future. In addition, it is expected that both already implemented and announced future interest rate hikes by the leading central banks will have an effect on FX lending in Georgia similar to monetary policy tightening. At the same time, as in case of the US dollar, the Monetary Policy Committee sets the remuneration of required reserves for funds attracted in euros fixed at 0 percent.

 

The NBG continuously monitors the developments in the economy and financial markets and will use all available tools to ensure price stability.

 

The next meeting of the Monetary Policy Committee will be held on October 26, 2022.