The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on December 24, 2008 and decided to lower its main policy rate (the refinancing rate), by 100 basis points to 8 percent.

The annual rate of inflation has been marked by decelerating in the recent months. Annual inflation in November stood at 6.3 percent. Core inflation measures have decreased significantly as well. It is noteworthy that the prices on medicines, unlike other products, have been increasing consequently largely contributing to annual inflation.

According to the latest data, the slowdown in economic activity is even more evident. The forecast growth of the gross domestic product has been lowered to 2 percent for 2008. Despite the growth in deposits in the banking system, commercial banks are still cautious in extending new loans. Therefore, lending growth rates are decreasing, which in turn, is restraining aggregate demand. The global financial crisis will likely continue to decrease domestic and foreign demand, which should act as a limiting factor for inflation. Thus, it is expected that disinflationary processes will continue in the beginning of the next year.

The Lari exchange rate correction has mitigated the influence of the global financial crisis on Georgia. The exchange rate will be more flexible in the future in order to soften external shocks on the economy, although the National Bank will seek to avoid sharp deviations in the exchange rate.

The global economic outlook has worsened and became more pessimistic since the last meeting of the MPC. Uncertainty regarding the possible impact and duration of the crisis has increased. According to existing forecasts, oil prices will be on a downward trend during the next year.

In light of the deepening global financial crisis and taking into consideration the existing forecasts, the National Bank of Georgia is softening its monetary policy stance.

The NBG will closely monitor current developments in the economy and financial markets with the objective of achieving the forecast inflation rate and will in due course act accordingly.

The next meeting of the Monetary Policy Committee will take place on January 21, 2009.