On December 21, 2022, the Monetary Policy Committee of the National Bank of Georgia (NBG) decided to keep the monetary policy rate (refinancing rate) unchanged. The monetary policy rate stands at 11.0 percent.

 

Russia's invasion in Ukraine has led to significant global economic disturbances and further exacerbated supply-demand imbalances already in place due to the pandemic. Recently however, there have appeared signs of price stabilization on international commodity markets. As a result of the sanctions lately imposed by the European Union, oil prices have decreased. At the same time, international shipping costs continue to fall at a rapid pace, which should be reflected in import prices. In Georgia inflation has already retreated from its peak and, even though it still remains at a high level at 10.4 percent in November, is now on a downward path. It is expected that given the appreciated exchange rate, the aforementioned global trends will be gradually transmitted to the local market, helping to further reduce inflation.

 

However, it is worth noting that, given current geopolitical circumstances, uncertainty is still high and risks to inflation are mostly on the upside.  At the same time, inflation has long deviated away from its target level, further amplifying inflation expectations and creating risks that nominal wage growth may significantly exceed the productivity growth. Inflationary effects stemming from demand are also noteworthy. Economic activity continues to be strong. The Russia-Ukraine war and the accompanying sanctions imposed on Russia have significantly increased migration flows into Georgia, boosting aggregate demand. According to preliminary estimates, economic growth in October was 8.3 percent while averaging 10.0 percent in the first ten months of 2022. According to the NBG's estimates, the current level of economic activity exceeds its potential level, which hinders the slowdown in inflation even with the strengthening of the lari exchange rate as a result of foreign inflows.

 

In response to these risks, the NBG maintains a tight monetary policy. As a result of the tight monetary policy and the recently implemented macroprudential measures, credit growth continued to decelerate. It is expected that these dynamics will persist in the future. At the same time, since the NBG maintains the remuneration on reserve requirements in the US dollar and Euro fixed at 0 percent, the gradual tightening of monetary policies by the European Central Bank and the Federal Reserve further strengthens the effects of the policy tightening on foreign currency loans in Georgia. It should also be noted that the increase in the countercyclical capital buffer announced at the most recent meeting of the Financial Stability Committee will also have a tightening effect on credit activity. Fiscal deficit is shrinking as well. The combination of these factors will neutralize demand-side inflationary pressures, which will help inflation decelerate. It is expected that the annual inflation will continue a gradual decline and will approach the target level in the second half of 2023.

 

It should be emphasized that taking into account the existing inflationary risks, tight monetary policy will be maintained in the near future and its normalization will only begin gradually and only after a clear trend of decreasing inflation is observed. On the other hand, if the inflation expectations rise and/or additional demand-side price pressures emerge, further tightening of policy or maintaining the current tight stance for a longer period might be necessary. If needed, the National Bank of Georgia will also use additional instruments to avoid inflationary pressure arising from the demand side.

 

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 February 1, 2023.