Georgia's central bank raised its benchmark refinancing rate by 50 basis points to 4.50 percent, as recently predicted by its governor, and said it expects to raise it further to 5.0 percent by the end of 2015 barring economic or financial shocks.
The National Bank of Georgia (NBG) embarked on a tightening cycle in February 2014 but then paused due to risks to domestic and external demand from the Russian-Ukrainian conflict. Georgia borders the Black Sea to the west, Russia to the north, and Turkey and Azerbaijan to the south.
But the central bank said it was now appropriate to neutralize growing inflation expectations and withdraw its accommodative policy stance, which remains below the neutral rate.
The NBG said inflation is expected to remain below its 5.0 percent target in the first half of this year and then reach it by the end of the year, though it added that its forecast was heavily dependent on external factors and both upside and downside risks.
Georgia's headline inflation rate eased to 1.4 percent in January from 2.0 percent in December due to the decline in fuel prices while the central bank said core inflation rose to 3.2 percent.
On Jan. 30 Governor Georgy Kadagidze said the central bank would start to gradually tighten its monetary policy as the depreciation of the lari currency had "reached a dangerous point which can lead to increased inflation expectations and rising prices," and this would "inflict significant damage on those citizens who have loans in U.S. dollars income in lari."
The lari started to depreciate slowly in May 2013 but then fell sharply in November that year. It then stabilized against the U.S. dollar for the following 12 months before falling sharply. Today it was trading at 2.03 to the dollar, down 7.4 percent since the start of the year.
Reuters reported last month that the central bank's reserves fell to $2.699 billion by Jan. 1 from $2.823 billion at the start of 2014, mainly due to currency market interventions last year.
The National Bank of Georgia issued the following statement: (translation by Google)
On 11 February 2015 the National Bank's Monetary Policy Committee decided to increase the refinancing rate by 50 basis points. Monetary policy rate of 4.5 percent.
Monetary policy decisions are based on macroeconomic forecasts, which increased the influence of the external shock of the forecast inflation risks. The Committee considers it appropriate to neutralize the growth of inflation expectations for a gradual withdrawal from the accommodative monetary policy. However, despite the strengthening of policy, the policy rate remains below the neutral point. Current forecasts, if no other shocks affecting the economy were key refinancing rate, at the end of 2015 will be within 5%.
At present, according to the forecast, inflation targets will be maintained below 5% in the first half of 2015 and it will reach the end of the year. Annual inflation was 1.4 percent in January. January inflation largely reflects a decline in prices of fuel, while core inflation rose to 3.2%. Predictions is heavily dependent on exogenous factors and changes in risks contained in both directions.
External imbalances in the economy of exchange rate changes is a natural reaction, which contributes to the mitigation of negative effects on the economy. The nominal effective exchange rate has depreciated annually, but Lari has depreciated against the US dollar. Because we have a high level of dollarization in Georgia against the US dollar depreciation against the dollar-denominated loans growth and inflation expectations inflation additional risks related to services provided by the increased costs as a result. Given the current trends, the central bank's Monetary Policy Committee decided to reduce the risks of inflationary monetary policy tightening.
The National Bank will continue to monitor developments in the economy and financial markets and will use all means available to him to ensure price stability. Further changes in the dynamics of monetary policy will depend on the dynamics of inflation, economic activity growth trends, global and regional economic environment.
The next meeting of the Monetary Policy Committee will be held on 25 March 2015."