The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on April 14, 2010 and decided to keep its Main Policy Rate (the refinancing rate) unchanged at 5 percent.

An annual growth rate of the gross domestic product of 0.4 percent was recorded in the last quarter of 2009, following a recession that lasted for a year-and-a-half.

The annual rate of inflation in March of 2010 was 5.8 percent.  Inflation dynamics are in accordance with the existing forecasts.  Inflation forecast parameters have not changed noticeably since the Committee’s last meeting and in the medium term, inflation should stay within the six (6) percent range.

The fast pace of growth in the monetary aggregates is worth noting. In April, the annual growth rate of M3 and M2 money aggregates exceeds 30 percent, which is largely due to growth in deposits over the last several months.  Time deposits are the main driving factor behind the growth in deposits. In the first quarter of the current year, a growth tendency has also been observed in lending by banks to the economy.  Despite the fact that the current growth in lending has been relatively sluggish, it is expected that the banking system will become more active in the credit markets over the coming months.

From April, the National Bank is planning on implementing several important steps that are aimed at re-invigorating monetary policy.  In particular, the minimum reserve requirements on Lari-denominated deposits will be raised to 10 percent, which is aimed at the development of the money markets and giving an incentive to the interbank credit market. At the same time, the NBG will remunerate additionally required amount on mandatory reserves with interest rate equal to policy rate.

At the same time, the NBG will make available guaranteed refinancing instruments with variable interest rates, which are aimed at boosting lending in domestic currency and increase the effectiveness of the monetary policy transmission mechanism.  Simultaneously, changes in the legal framework envisage the expansion of eligible collateral (collateral base) for use with the abovementioned instruments, which is yet another step towards aiding the larization of the economy.  In addition, NBG will use the Bloomberg trade platform for refinancing loan instruments. Moreover  the National Bank will introduce standing facilities from April 29 in the form of overnight loans and overnight deposits, which should reduce the fluctuation of interest rates in the interbank market.

Changes in reserve requirements also incorporate and cover funds borrowed from non-residents, in order to place funds borrowed from foreign sources on equal footing with funds borrowed in domestic markets.  The aforementioned change will go into effect in September and its goal is to aid the larization of the banking system, which is vital for the effective implementation of monetary policy and as a result, to achieve a stable economic environment.

The NBG will closely monitor current developments in the economy and financial markets and will in due course act accordingly.

The next meeting of the Monetary Policy Committee will take place on May 25, 2010.