Georgia's central bank raised its benchmark refinancing rate by a further 50 basis points to 5.5 percent and said it considers it necessary to raise the rate gradually to 6.5 percent by the end of the year, an increase from 5.5 percent that it forecast in May.
The National Bank of Georgia (NBG), which has now raised its rate by 150 basis points this year, said it expects inflation to reach it's 5.0 percent target in the second half of this year.
Georgia's inflation rate rose to 3.5 percent in May from 2.5 percent in April though the rise in inflation is being partly offset by lower fuel prices.
But the lari's exchange rate depreciated from November last year until mid-May, putting pressure on long-term interest rates and driving up inflation expectations, the central bank said. Changes in the exchange rate have already affected demand for imports, which will help adjust the external balance.
The lari started falling in November 2014 and hit a low of 2.36 to the U.S. dollar on May 16 before rebounding. Today the lari was trading at 2.24 to the dollar, for a 16 percent depreciation this year.
"The domestic demand remains weak," the NBG said, with economic activity up by 2.1 percent in May.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on July 1, 2015 and decided to increase the refinancing rate by 50 basis points to 5.5 percent.
The monetary policy decision is based on the macroeconomic forecast, which shows increase in the inflation expectations as well as in the domestic and external risks affecting the forecast inflation. In line with the existing forecast the Monetary Policy Committee considers necessary to increase the monetary policy rate gradually to 6.5 percent by the end of the year.
The domestic demand remains weak. According to preliminary information in May the economic activity grew by 2.1%. The recovery of the demand is furthermore hindered by the decline in the loan growth in the recent months. The significant decrease in import also indicates the weakened demand.
The inflation rate has been increasing during the recent months with the annual decrease in fuel prices partially offsetting the inflation rise. The deterioration in economic trends in our main trade partners continues to affect negatively Georgian economy. Goods export, and remittances have decreased, while the growth rate in tourism inflows is low. At the same time the pressure on the policy of the National Bank pushes up the long-term interest rates, reduces the efficiency of the monetary policy transmission and drives up the inflation expectations. The changes in the exchange rate have already affected the import demand, which in turn ensures the adjustment of external imbalance. According to current forecast the inflation will reach its target value in the second half of 2015.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal to ensure price stability. The dynamics of further changes in monetary policy will depend on the dynamics of expected inflation, tendencies in economic growth, global and regional economic environment.
The next meeting of the Monetary Policy Committee will be held on August 12, 2015."