Georgia's central bank cut its benchmark refinancing rate by 50 basis points to 7.50 percent as it begins to gradually roll back last year's monetary tightening but said further rate cuts would depend on inflation forecasts.
It is the first change in policy direction by the National Bank of Georgia (NBG) since December last year when the central bank completed its 2015 tightening campaign that saw rates raised by 400 basis points in response to accelerating inflation from currency depreciation.
The NBG also lowered the minimum reserve requirement on liabilities in domestic funds by 300 basis points to 7.0 percent but raised the requirement on foreign currencies to 20 percent from 15 percent to ensure financial stability.
Today's rate cut follows last month's statement by the NBG that it didn't consider further rate increases necessary in light of the latest inflation forecasts, with the bank today adding that forecasts show that its tightening in 2015 had a positive impact on reducing inflation expectations.
The central bank now forecasts that inflation will remain moderate in coming quarters and temporarily fall below its target of 5.0 percent as inflation expectations have declined.
The bank added that that the neutral policy rate was estimated at 5 - 6 percent.
Georgia's inflation rate eased to 4.1 percent in March from 5.6 percent in February, continuing the decline since hitting 6.3 percent in November last year.
The exchange rate of Georgia's lari fell by 22.5 percent against the U.S. dollar in 2015 but it has been rising steadily since mid-February. Today it was quoted at 2.23 to the dollar, up 7.6 percent since the start of this year.
The central bank also said economic growth in 2016 should hit its forecast of 3.0 percent and said it expects the recent trend toward positive investments in the construction sector to continue.
However, higher market rates on lari-denominated loans would still have the effect of weakening demand along with weaker growth in trading partners and remittances.