Inflation Target
The inflation target is 3%
The National Bank of Georgia considers a 3% inflation rate as an optimal level for a developing country like Georgia. On the one hand, 3% is low enough and does not negatively affect the decisions of economic agents. On the other hand, it is not so low as to hinder economic growth. Thus, the main goal of the NBG is to ensure inflation rate of 3%. However, this does not mean always keeping inflation at 3% in the short run. In the short-run exogenous one-off shocks can cause inflation fluctuations. Central banks do not usually respond to these types of shocks, as its impact is temporary. Once the shock abates, the inflation automatically returns to the target level. Short-term inflation fluctuations cannot be counteracted by monetary policy as it is usually counterproductive and causes excessive economic fluctuations. The NBG responds to supply side shocks only if it reflects elevated medium and long-term inflation expectations and creates so-called second-order effects.
Assessing the optimal level of inflation depends on a variety of factors, including economic growth and productivity. In general, productivity in developing countries growth at a higher rate, resulting in higher relative price fluctuations, which is why such countries are characterized by a higher inflation compared to developed countries. In developing economies, tradable sector is particularly charactirised by higher productivity growth, which ultimately leads to wage increases. The mobility of labor leads to wage growth in other sectors as well (the Balasa-Samuelson effect). Therefore, developing economies are characterised by higher wage and price inflation compared to developed countries. According to the estimates of the National Bank, at the current stage of development, the desired rate of inflation for Georgia is 3%.