The Parliament of Georgia has approved the main directions of monetary and exchange rate policies for 2018-2020

The Parliament of Georgia has approved the main directions of monetary and exchange rate policies for 2018-2020

23 December, 2017
The Parliament of Georgia has approved the main directions of monetary and exchange rate policies for 2018-2020 with 77 votes, presented to the legislative body by Koba Gvenetadze, the Governor of the National Bank of Georgia.

As defined in the Organic Law on the National Bank of Georgia, the NBG presents the main directions of monetary and exchange rate policies for next three years to the parliament of Georgia. The report sets the inflation target, describes monetary policy instruments that will be employed by the NBG and reviews potential risks.
Koba Gvenetadze spoke about the advantages of inflation targeting regime and noted that the inflation target is a medium-term indicator. The NBG conducts the monetary policy in a manner that inflation is gradually approaching the target level.

"Inflation targeting regime is the most efficient mechanism for ensuring price stability and implies the announcement of inflation target and determining the relevant monetary policy to achieve the targeted indicator in the medium term. I would like to emphasize that inflation targeting does not mean that inflation should always be equal to the target - sometimes inflation it will be above its target, and sometimes it may stand below its targeted rate. However, every time inflation will be approaching to the target level in the medium term". -said the governor of the National Bank.

Koba Gvenetadze explained that the monetary policy is transmitted to the economy with a certain time lags, which is 2-3 years in developed countries and 1-1.5 years for the countries similar to Georgia.

"It is possible to reduce the inflation level even faster, however it will lead to growth of unemployment and a sharp decline in economic growth. In an inflation targeting regime, the price stability is achieved with the minimum social costs, while the long term economic growth is higher and more stable compared to the other alternatives. Therefore, the task set out by the mandate of the National Bank is achieved: the price stability and the long-term sustainable growth,“ - explained Koba Gvenetadze.

The National Bank's Governor also noted that the optimal inflation rate for Georgia is 3% and it is important to reach the target gradually in the medium term, to maintain price stability and support long-term sustainable growth. This goal is achieved through inflation targeting regime, which is considered as the most efficient and modern approach.

According to Koba Gvenetadze when inflation target of 3% is announced “we do not imply inflation from 0% to 3% but rather that inflation close to 3% in the medium term. The Governor of the NBG explained that “inflation target is a medium term indicator in an inflation targeting regime, thus inflation target in Georgia, starting from 2018 will be set at 3% in the medium term. When we say inflation target is 3% we do not imply inflation from 0% to 3% but rather that inflation close to 3% in the medium term. Focusing on the medium term is key, as shocks happen constantly and the inflation rate may differ from its targeted rate. Sometimes it will be above its target, and sometimes it will stand below its target. However, with the monetary policy set by the National Bank, the inflation rate will move towards the target rate in the medium term and as a result inflation will be close to target in the medium term. “The Governor of the National Bank also discussed the inflation dynamics and forecasts. He pointed out that during this year inflation was expected to be above target, but this was caused by temporary factors, and therefore, looking at the medium term, tightening monetary policy would not be a right move.

"In November, the annual inflation rate stood at 6.9%. The inflation rate remains above NBG’s target, however inflation level is consistent with the National Bank’s forecast and increase in CPI inflation is caused by exogenous factors affecting the supply side, such as increased excise taxes and the higher price of oil on international markets. The impact of these temporary factors will remain until the end of 2017. According to existing forecasts, the inflation will start to decline with the exhausting of temporary factors from the beginning of 2018 and as a result of the proper response from monetary policy side the inflation will reach the target in the second half of the next year,” -  said Koba Gvenetadze.

While presenting the report, the Governor of NBG has discussed inflation target, recent trends in prices and the affecting factors.

"After the Monetary Policy Committee meeting on 25th of October, the nominal effective exchange rate has significantly depreciated compared to previous forecasts, increasing the pressure on inflation (a similar scenario was reviewed in the Monetary Policy Report of November, 2017). At the same time the market surveys of the past two months indicate the increase in inflation expectations, whereas the larger than expected improvement in economic activity decreased the downside pressure on inflation coming from demand-side. Based on the aforementioned, a monetary policy action is needed in order to reduce inflation in the medium term. At present the Committee decided to increase the policy rate by 25 basis point. The magnitude and duration of further monetary policy tightening will depend on how fast the pressure on prices coming from the nominal effective exchange rate will decrease.”, - said Koba Gvenetadze.

The Governor of the NBG further explained that except for nominal effective exchange rate depreciation inflation level is also affected by the price of oil on international markets. In the second half of 2017, international prices on oil have increased by around 40%. International prices of oil is one of the exogenous factors that is directly transmitted to CPI inflation. In Georgia, like in any other open market economy, exogenous (independent from monetary policy) shocks happen constantly, affecting the inflation rate and causing temporary deviations from the target. 

In his speech, Koba Gvenetadze has also discussed the exchange rate policy. He noted that from 2009, onwards, Georgia is operating under floating exchange rate, which is an optimal policy regime for small open economies to support sustainable growth and stable macroeconomic environment.
"For a small open economy which is not integrated in any economy with stable monetary policy, and is characterized with free capital mobility a floating exchange rate regime is essential for maintaining competitiveness and long-term economic growth. Flexible exchange rate regime is optimal for ensuring long-term stability for our economy. It is characterized by short-term fluctuations and at the same time works as a shock absorber".

The Governor of the National Bank explained that the exchange rate in a floating exchange rate regime is determined by market forces. "This means that short-term dynamics of the exchange rate depends on the demand-supply balance on the FX market and consequently it is characterized by the short term fluctuations, but at the same time, it also absorbs the shocks, stabilizing economy in long term. The crisis of  2008-2009 has clearly demonstrated that countries with flexible exchange rates have suffered less damage, and recovered faster (including Georgia) than countries with fixed exchange regimes.” -  said Koba Gvenetadze.

The Governor of the National Bank answered the questions of MPs.