The National Bank of Georgia (NBG) has now cut its rate four times this year by a total of 150 basis points as it continues to phase out its tight policy to ensure that inflation reaches its target.
The NBG raised its rate by 400 points last year in response to a fall in the lari's exchange rate and a rise in inflation. The central bank targets inflation of 5 percent this year, then 4 percent in 2017 and 3 percent in the following years.
In July the central bank also said it expected to cut its key rate to 6 percent.
Georgia's inflation rate dropped to 0.9 percent in August, in line with the NBG's forecast and down from 1.5 percent in June, with the central bank saying the expiration of base effects were an important factor along with weak demand.
It's current forecast sees inflation reaching the target by the end of next year as aggregate demand should improved along with a phasing out of tight monetary policy and fiscal stimulus.
The lari was trading at 2.3 to the U.S. dollar today, slightly up from 2.4 at the start 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 September 7, 2016 and decided to reduce the refinancing rate by 25 basis points to 6.5 percent.
The monetary policy decision is based on the macroeconomic forecast, according to which the phasing out of tight monetary policy must continue in order for inflation to reach its target value. According to the forecast, other things equal, the monetary policy rate may be expected to decrease to 6% in the medium term.
The annual CPI inflation in August dropped to 0.9%, in line with the current forecasts. Expiration of base effect was an important factor causing the inflation to decrease. Weak aggregate demand pushed inflation down as well. According to the current forecast the inflation will remain low in the coming quarters reaching the target by the end of 2017.
Improvement in aggregate demand and, as a result, inflation closing on its target, is supported by both the phasing out of the tight monetary policy and fiscal stimulus. The further changes in the monetary policy rate will depend on the processes taking place in the economy, possible realization of external sector risks and the magnitude of shock transmission from trade partner countries to Georgian economy.
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 October 26, 2016. "