The National Bank of Georgia (NBG), which has now raised its rate by 200 basis points this year, added "the rate of further changes in the monetary policy will depend on the inflation forecast" and this forecast shows a rise in inflation expectations.
The central bank said current forecasts show inflation slightly overshooting its 5.0 percent target by end-2015, noting inflation rose to 4.9 percent in July from June's 4.5 percent, mainly due to higher costs of imports and production costs from the depreciation of the exchange rate.
Another factor that the central bank said was driving up long-term interest rates, weakening the efficiency of its policy and driving up inflation expectations was what it described as "the attempt to discredit" its policy.
Georgia's president, Georgy Margvelashvili, on July 31 vetoed a bill that would strip the central bank of its banking supervisory functions. The bill, which was passed by the ruling government coalition in the parliament, hands supervision to a new agency run by a seven-member board of which five would be appointed by government-nominated candidates and two by the central bank.
The Georgian lari depreciated against the U.S. dollar from late November 2014 a hit a low of 2.36 in mid-May, hit by Russia's economic, a fall in remittances - which weakened domestic demand - along with a fall in exports.
While the decline in the lari has driven up inflation expectations, the central bank said it also led to a drop of 21 percent in second quarter imports, excluding hepaitis C medications funded by a grant.
"Accordingly we can assume that the impact of existing external shock on the exchange rate has been exhausted," the NBG said, adding that "no additional pressure can be expected on the exchange rate coming from the existing external shock."
Since mid-May the lari has remained largely steady, trading around 2.33 to the dollar today, but is still down 19 percent since the beginning of the year.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on August 12, 2015 and decided to increase the refinancing rate by 50 basis points to 6.0 percent.
The monetary policy decision is based on the macroeconomic forecast, which indicates increase in the inflation expectations as well as in the domestic and external risks affecting the forecast inflation. Aggregate demand is still weak due to the negative economic developments in our main trading partners. Domestically a factor worth mentioning is the attempt to discredit the policy of the National Bank, which pushes up long term interest rates, weakens the monetary policy transmission efficiency and drives up inflation expectations.
In line with the existing forecast the Monetary Policy Committee considers appropriate to continue normalization of the monetary policy. Unless additional shocks occur, the monetary policy rate by the end of the year will be within 6.5 percent. The rate of further changes in the monetary policy will depend on the inflation forecast.
According to existing forecasts, due to the one-time factors the inflation might slightly overshoot its 5% target value by the end of 2015. The annual growth in consumer prices equaled 4.9% in July, getting close to the 5% target value set by the National Bank. The main factors causing rise in inflation was the increase in the intermediate costs of production due to exchange rate depreciation and higher prices on certain imported goods. The rise in inflation has been limited by the weak aggregate demand and decrease in the world prices of oil and food products.
According to preliminary information the real GDP growth in the second quarter was consistent with the forecasts. The factor hindering the growth is the external sector, which, given the dire economic situation in the region negatively affects the export of goods and services. The domestic demand has also weakened, as a result of the decline in remittances and increase in the service burden of foreign currency denominated loans.
There have been some positive developments in relation to the elimination of external imbalance. Given the decrease in foreign currency remittances the change in the exchange rate has caused import to adjust. In the second quarter import has decreased by 21 percent (not taking into account the import of hepatitis C treatment medications, funded through the grant). Accordingly we can assume that the impact of the existing external shock on the exchange rate has been exhausted. Other things equal no additional pressure can be expected on the exchange rate coming from the existing external shock.
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 September 23, 2015."