The National Bank of Georgia raises the monetary policy rate by 1 percentage point to 8.5%

The National Bank of Georgia raises the monetary policy rate by 1 percentage point to 8.5%

23 October, 2019

The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on October 23, 2019, and decided to raise the refinancing rate by 1 percentage point to 8.5 percent.

In September, the annual inflation rate stood at 6.4 percent. Along with one-off factors, the overshooting the target was caused by the increased pass-through from the nominal exchange rate depreciation to inflation in recent periods. According to the forecast, other things equal, the inflation will remain above the target during this year, will start to decline from March 2020 and stay close to the target in the medium term.

From September, The NBG started to tighten monetary policy aiming at neutralizing inflationary pressures stemming from the exchange rate depreciation. Over the last two meetings, the Monetary Policy Committee raised the policy rate in total by one percentage point. As it was noted in the statements, the policy tightening would continue until the pressure from exchange rate receded.

The GEL nominal effective exchange rate remains undervalued, exerting upward pressure on inflation. This inflationary pressure is only partially offset by the aggregate demand-side factors as the economic activity is enhanced compared to previous periods, based on preliminary estimates. Hence, on today's meeting, the Monetary Policy Committee decided to increase the refinancing rate by one percentage point. The future decisions of the committee will depend upon the speed of neutralization of exchange rate pressure stemming from the exchange rate depreciation.

According to the preliminary estimates, in the third quarter, the current account balance continued to improve. The persistence of positive dynamics in the external sector, together with the monetary policy tightening, should support the strengthening of the exchange rate through expectations channel, and, hence, provide favorable inflation dynamics in the medium term.

The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal to ensure price stability.

The next meeting of the Monetary Policy Committee is scheduled on December 11, 2019.