The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on July 20, 2011 and decided to lower its Main Policy Rate (the refinancing rate) by 25 basis points to 7.75 percent.

Consumer Price Index decreased by 4 percent in June, 2011 compared to the previous month. The annual inflation rate stands at 10 percent. The share of food remains high in the annual rate of inflation and amounts to 9.1 percent. The core inflation net of food and energy decreased further to 0.3 percent in the month of June. The inflation in service sector is also low and stands at 1 percent.

Reduction in consumer price index was expected, although the recent trend shows faster decrease in inflation than it was expected earlier. According to the existing forecasts, inflation can possibly decrease below the target level at the beginning of next year.

Based on the abovementioned, MPC decided it is appropriate to start monetary policy easing on time, in order to maintain the inflation at the target level in the medium term. Lowering the policy rate is the first step towards monetary policy easing. If the reduction in inflation persists due to decreased aggregate demand, the NBG will continue monetary policy easing.

Furthermore, the MPC decided to reduce the reserve requirements on long-term borrowings with the intention to stimulate the long-term financing of commercial banks. Borrowings in national currency with the remaining maturity over 1 year and borrowings in foreign currency with the remaining maturity over 2 year will be excluded from reserve requirements. As for the borrowings in foreign currency with maturity from 1 to 2 year, the reserve requirement is reduced to 5 percent.

World prices of oil has substantially decreased in recent period. It should be mentioned, that removal of the Russian and Ukrainian bans on exports of wheat in the month of June will contribute to the reduction in prices of wheat products. The influence of exogenous factors, that kept inflation high during the year, is gradually fading away. Consequently, a sharp decrease in inflation is expected in the third quarter.

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

The next meeting of the Monetary Policy Committee will be held on August 17, 2011.