The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on July 25, 2018 and decided to cut the refinancing rate by 25 basis points. The reduction of the policy rate will continue at a slower pace than indicated in the previous forecasts. Currently, the policy rate stands at 7.0 percent.

In line with the forecasts, at the beginning of 2018 inflation rate declined and remained around the target level of 3%. In June, the annual inflation equaled 2.2 percent, which is close to the target level. According to the forecasts, other factors being equal, inflation is expected to fluctuate near the target level. In the first half of the year, following the improvement in economic activity, the utput gap is closing at a faster pace than previously expected. Therefore, the downward pressure on inflation stemming from aggregate demand has declined. However, higher than expected appreciation of the nominal exchange rate reduced inflationary pressure. Moreover, the upward risks to inflation forecast have also weakened. Hence, the Monetary Policy Committee deemed appropriate to start the gradual exit from moderately tight monetary policy. However, following the recent improvement in aggregate demand, the monetary policy easing will continue at a slower pace than previously expected.

The economic activity increased significantly in the first half of 2018 and, based on preliminary estimates, in the first five months of 2018 the real GDP growth equaled 6.1 percent, which is higher than previously anticipated, largely due to stronger than expected external demand. Meanwhile, growth in remittances and credit supports the improvement of domestic demand as well. As a result, the National Bank of Georgia revised the economic growth forecast upwards to 5.5 percent.

Favourable trends in the external sector persisted. In particular, the exports of goods (28 percent)  and tourism revenues (24 percent) continue to grow at a fast pace. Positive dynamics of remittances (18 percent annual growth) also persisted. However, the growth rate of imports accelerated as well (23 percent).

To mitigate potential risks to the financial stability in the future, the monetary policy committee decided to increase the reserve requirements on short-term funds (remaining maturity less than one year) attracted in foreign currency from 20% to 25%.

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 the price stability.

The next meeting of the Monetary Policy Committee will be held on September 5, 2018.