Georgia's central bank raised its benchmark refinancing rate by a further 100 basis points to 7.0 percent due to rising inflation expectations stemming from currency depreciation and warned that it would "use all the tools at its disposal" to avoid that a rise in inflationary expectations do not turn into higher inflation rates.
The National Bank of Georgia (NBG), which has now raised its rate by 300 basis points this year, added in a statement from September 23 that further changes would depend on inflation, economic growth and the global and regional economic environment, a change in tone from last month when it said it expected to raise the rate further this year as it continued to normalize its policy stance.
Georgia's inflation rate rose to 5.4 percent in August from 4.9 percent in July and is currently forecast to temporarily deviate from the bank's 5.0 percent target until the end of 2016.
The central bank said exchange rate depreciation is still determining the inflation rate due to rising costs of production of intermediate and some imported goods, while a one-off increase in electricity tariffs also had a significant impact on inflation. Meanwhile, weak demand and lower oil prices are helping restrain food prices, the NBG said.
Georgia's lari started depreciating sharply against the U.S. dollar in late November 2014, and after a rebound in May and June, it again started falling in July. In response to the central bank's decision, the lari firmed to be trading at 3.8 to the dollar today for a depreciation of over 50 percent this year.