The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on January 18th, 2011 and decided to increase to 15 percent the reserve requirements for the foreign currency liabilities starting on February 17th. As for its Main Policy Rate (the refinancing rate), the NBG decided to keep it unchanged at 7.5 percent.

Annual inflation reached 11.2 percent by the end of 2010. The contribution of food in total CPI growth was around 9.5 percentage points. Despite high inflation, there is low inflationary pressure from the demand side. At the same time the food inflation feeds to higher inflation expectations. According to the forecasts, high inflation will hold during first months of the year and then start decreasing.

The annual growth rate of monetary aggregates has declined. It is expected that during the year the annual growth rate of broad money will be within 20-25 percent, thus supporting in the medium term the decrease of the inflation rate down to the target value. During 2010 the bank loans extended to the economy have increased by 20%. This happened mostly through local currency loans, although in the recent period the foreign exchange loans have grown as well.

At the previous meeting the Monetary Policy Committee decided to increase the reserve requirements for foreign currency liabilities gradually up to 15%. The first stage involved the increase of the ratio to 10% starting on January 20th, 2011. As mentioned before at present the inflation rate is quite high, mostly because of the exogenous factors. In order to avoid the risk of demand side inflationary pressure, it is advisable to continue the tightening policy. To that end the reserve requirement for the foreign exchange liabilities will be increased to 15% starting on February 17th.

The NBG will closely monitor developments in the economy and financial markets and will in due course act accordingly. In case of continued inflationary pressure the NBG is ready to further tighten monetary policy.

The next meeting of the Monetary Policy Committee will take place on February 16th, 2011.