Georgia's central bank cut its benchmark refinancing rate by a further 50 basis points to 7.0 percent as it continues to reverse last year's tightening, saying "the rate of further monetary policy softening will depend on the revised inflation forecasts and on the dynamics of economic recovery."
In April the National Bank of Georgia (NBG) began rolling back last year's rate hikes that totaled 400 basis points and has now cut its rate by 100 points as it lowers it toward a neutral level, estimated at 5-6 percent.
The NBG said last year's tightening had helped lower inflation expectations and the central bank expects inflation to ease further in coming quarters to temporarily below the target.
The central bank's inflation target for this year is 5 percent, then 4 percent in 2017 and 3 percent afterwards.
In the first half of next year, the NBG expects inflation to reach its 4.0 percent target.
Georgia's inflation rate dropped to 2.1 percent in May from 3.2 percent in April to the lowest level since February 2015 due to lower inflation expectations, weak demand and base effects.
Last year Georgia's inflation topped out at 6.3 percent in November as the lari's exchange rate depreciated by 22.5 percent against the U.S. dollar.
But since mid-February, the lari has bounced back and was trading at 2.13 to the dollar today, up 12.7 percent since the start of this year.
On May 17 the NBG was reported to have bought US$20 million, the eight intervention by the central bank since March as the lari appreciates. From March 17 to May 17 the central bank bought US$115 million during these interventions.
In January this year, when the lari was still falling, the NBG was reported to have sold a total of US$60 million in three interventions following nine separate interventions in 2015 that involved the sale of a total of US$287 million to support the lari.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on June 15, 2016 and decided to reduce the refinancing rate by 50 basis points to 7.0 percent.
The monetary policy decision is based on the macroeconomic forecast, according to which the tightening of the monetary policy by the NBG throughout 2015 has reflected positively on the decrease in inflation expectations. According to the current forecast the annual inflation will decrease in the coming quarters, temporarily keeping below the current target value. The inflation will reach the target value of 4% in the first half of 2017.
The annual inflation in May dropped to 2.1%. This decrease in the annual inflation was largely due to the expiration of base effect and decrease in inflation expectations. The weak aggregate demand is another factor pushing the inflation down.
Recently increased investment activity and partial improvement in the external demand have had positive effect on the economic growth. This trend is expected to continue in the coming periods as well. On the other hand increased interest rates on Lari-denominated loans and the overall weakening of the credit portfolio growth rates weakens the aggregate demand. According to the current forecast of the National Bank the economic growth in 2016 will stay below the potential level.
Based on the aforementioned the Monetary Policy Committee considers necessary to continue phasing out the tight monetary policy, which means the reduction of the refinancing rate down to the neutral level in the medium-term. Therefore the Committee decided to reduce the policy rate by 50 basis points. The rate of further monetary policy softening will depend on the revised inflation forecasts and on the dynamics of economic recovery in general.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal in order to ensure the price stability.
The next meeting of the Monetary Policy Committee will be held on July 27, 2016."