The Monetary Policy Committee (MPC) of the National Bank of Georgia, decided during its unscheduled meeting on August 27, to introduce refinancing operations from September 1, 2008.

The Committee noted that the Georgian financial system was marked by a liquidity surplus over the last several years.  During this period, the National Bank absorbed excess liquidity from the financial system through the use of its Certificates of Deposit (CDs), in order to influence the rate of inflation.  At the same time, the 7-day CD rate was used as the Main Policy Rate.  At present, the financial environment has changed and the banking system is not experiencing surplus liquidity any longer.  The use of CDs for monetary purposes has been declining, because the demand for the abovementioned securities has declined.  Instead, the demand for short-term liquidity has increased.

If the short-term liquidity needs of the banking system are not met, this could possibly lead to certain risks, which could imperil maintaining price stability in the long-term.   In order to avoid the possible occurrence of any such event, the MPC decided to introduce a 7-day refinancing instrument for conducting monetary policy operations and to temporarily cease conducting the 7-day CD operations.  The NBG will provide short-term liquidity through the abovementioned refinancing operations according to a tender , with Government and National Bank securities serving as collateral.

The Main Policy rate will be incorporated into refinancing operations, which will be used to determine the minimum bid rate, whereas the Main Policy rate was previously used to determine the maximum interest rate during the 7-day CD auctions.  The refinancing auctions will be conducted weekly and the National Bank will simultaneously keep the 91-day CD auctions, which will still play a supplementary role and help maintain the stability of the financial system.

Refinancing operations are the main monetary policy instrument at central banks such as the European Central Bank (ECB), the Federal Reserve System, Bank of England, etc.  The abovementioned instrument will ensure the efficiency of monetary policy as well as help in further improving the financial stability of the banking system.