Wednesday, November 4, 2015

Georgia raises rate 50 bps to curb inflation expectations

     Georgia's central bank raised its benchmark refinancing rate by a further 50 basis points to 7.50 percent and again warned that it "will use all means and instruments at its disposal in order to prevent the negative expectations that have been on the rise in the recent period from growing into  an inflationary process."
    The National Bank of Georgia (NBG), which has now raised its rate by 350 basis points this year, also repeated that further changes in monetary policy will depend on inflation, economic growth along with the global and regional economic development.
    Georgia's inflation rate rose to 5.8 percent in October, the highest since August 2011, and the central bank forecasts inflation to remain above its 5.0 percent target in the first half of next year before declining to the target in the second half.
    The main reason for the rise in inflation is from higher production costs and some imports due to the depreciation of the lari along with a one-off rise in electricity tariffs.
    Georgia's lari currency started depreciating sharply against the U.S. dollar in November 2014 and hit a low of 2.46 to the U.S. dollar in mid-September this year. Since then, the lari has stabilized and was trading at 2.39 to the dollar today, still down 21 percent this year.
    "We can assume that the impact of the existing external shock on the exchange rate has been exhausted," the central bank said, adding that it does not expect additional pressure on the exchange rate barring new developments.
    In response to the fall in the lari and the decline in foreign currency inflows, imports have declined which has helped eliminate external imbalances, NBG said.
    It added that economic growth in the third quarter was in line with its estimate, with growth since the start of the year of 2.7 percent. Exports are being slowed by the weak economy in the region while domestic demand also remains weak due to the decline in remittances and a higher cost of servicing foreign-currency debt from the lower exchange rate.
    In the second quarter of this year, Georgia's Gross Domestic Product expanded by an annual 2.5 percent, down from 3.2 percent in the first quarter.


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