The National Bank of Georgia keeps its policy rate unchanged at 8.0 percent

The National Bank of Georgia keeps its policy rate unchanged at 8.0 percent

09 December, 2020

The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on December 9, 2020, and decided to keep the refinancing rate unchanged at 8.0 percent.

Annual inflation has been at 3.8 percent in recent months. According to the current forecast, other things equal, the inflation rate will hover close to the target level in the first half of 2021. Inflation dynamics is mainly determined by weak aggregate demand and this impact is expected to persist next year as well. Still, the effect on aggregate demand coming from increased pandemic-related social and economic support fiscal measures of 2020-2021 is noteworthy. The Monetary Policy Committee also took into account the supply-side factors, such as the increase in production costs due to additional restrictions in the wake of the pandemic. The Committee also took note of the uncertainties surrounding the prolonged pandemic and the global restrictions. Moreover, due to the still high dollarization of the economy, the room for easing monetary policy is limited. According to the current estimates, a tight monetary policy may be necessary for longer, subject to inflation expectations and the dynamics of economic activity. Depending on the economic developments, the Committee does not rule out the need for an increase in interest rate in the future.

According to preliminary indicators, aggregate demand is weak. Based on rapid estimates, economic activity fell by 3.9 percent year-on-year in October and by 5.1 percent over the first ten months of the year. After the decline in 2020, economic activity is expected to recover gradually from 2021. According to the current forecasts, other things equal, domestic demand will be the main driver of economic growth in 2021. In contrast, external demand remains significantly reduced and slow growth is projected for 2021 as well. The revenues from international travelers are minimal and, according to preliminary data, fell by 94 percent year on year in October. Amid weak aggregate demand, imports of goods fell by annual 24 percent in October. After a small increase in the previous month, exports declined again. In contrast, the high growth of remittances persists.

As part of Covid-19-related measures, the European Central Bank and the NBG agreed to launch a €100 million euro repo line to support liquidity. This line was introduced under the framework of the Eurosystem repo facility  for  central banks (EUREP). The purpose of the instrument is to supply euro liquidity to the Georgia's financial system in case of need. The mechanism will be in force until June 30, 2021, and its operational support will be provided by the German Bundesbank.

The NBG continues to monitor 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 3, 2021.