The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on February 16th, 2011  and decided to increase to its Main Policy Rate (the refinancing rate) by 50 basis points, to 8 percent.

Annual inflation reached 12.3 percent in January 2011. In the month of January consumer prices grew by 2.1 percent.  This figure exceeds the target inflation set by the National Bank. It is important to assess correctly the reasons behind the inflation and its impact on future price level in the medium term. In the same way as in other countries of the region in Georgia high inflation is due to the hike in the world market prices of fuel and agricultural goods. Reducing such inflation using the monetary instruments is only possible under the conditions of significant economic tightening. Such exogenous factors affect the inflation only temporarily and central banks usually do not react to it (since the social cost of such reduction in inflation far exceeds its benefit). Although, it should be taken into account that food has a large share in consumers expenditure in Georgia, therefore the growth in food prices creates high inflation expectations. The latter, in turn, negatively affects the medium-term inflation, and keeping the medium-term inflation within the target range is the main task of the National Bank.

Based on the aforementioned, the National Bank has been tightening the monetary policy since the summer, according to the actual risks. It should be taken into account that the monetary policy transmission influences consumer prices only after a certain lag. That is why the tightening of the monetary policy in the previous months has not been completely transmitted to the real economy.

In January the interest rates on loans in foreign currency have grown up, which is related to the recent monetary tightening. Along with the interest rates’ growth, the growth rate in the foreign currency loans has decreased.

Since the beginning of the year both the annual growth rate of monetary aggregates and their volume have declined (the latter mostly due to seasonal factors). It is expected that during the year the annual growth rate of broad money will be within 20-25 percent, thus given the forecasted economic growth rate is in line with the inflation target value.

It was already mentioned that the decisions reached at the precious meetings of the MPC so far have not been completely transmitted to the real economy. However, in order to control inflation expectations, it is advisable to further tighten the monetary policy – which was reflected in the decision of the Committee.

The NBG will closely monitor 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 March 16th, 2011.