The rate hike comes after the National Bank of Georgia (NBG) in December dropped its guidance that rates were expected to decline to 6.0 percent due to the expected impact on inflation from a one-time rise in excise taxes and a weakening of the exchange rate of the lari.
Last year the NBG cut its rate four times by a total of 150 basis points.
The central bank said it expects inflation to be above its target for most of this year despite weak demand before declining in 2018 and then remaining below target.
Georgia's inflation rate rose to 1.8 percent in December from 0.2 percent in November with the NBG attributing accelerating inflation to one-off events such as higher taxes and the lower lari from the general strengthening of the U.S. dollar and depreciation of Turkey's lira.
Georgia is located in the Caucasus region and borders Turkey, Armenia and Azerbaijan to the south and Russia to the north.
The lari fell from November 2014 until March 2016 when it bounced back. But it began another period of weakness from June 2016 until late December when it fell to record lows just below 2.80 to the U.S. dollar.
Since then it has firmed slightly but was still trading at 2.70 today, down 1.4 percent since the start of this year.
The National Bank of Georgia released the following statement:
"The Monetary Policy Committee of the National Bank of Georgia met on 25th of January, 2017 and decided to increase the refinancing rate by 25 basis points to 6.75 percent.
The monetary policy decision is based on the macroeconomic forecast, according to which while demand side pressure on prices is weak, inflation is expected to be above its target rate for the most of the 2017. Nonetheless inflation is going to decline in 2018 and remain below the target. According to the forecast the temporary increase in inflation is a result of one-off events; the increase in excise taxes as well as exchange rate developments should be singled out in this regard. The latter dynamic in exchange rate was mainly driven by Turkish Lira depreciation in the second half of last year and the global strengthening of the US dollar. These new developments have pushed inflationary expectations up and in order to curb them the NBG, based on current forecast, deems necessary to gradually increase the policy rate to 7% over the next two quarters. At this stage policy rate has been raised by 25 basis points. After the elimination of the impact of the aforementioned one-off events the inflation will start declining and will stay close to the target in the medium term. Other things equal, as factors affecting inflation are exhausted the policy rate in the medium term will gradually return to its neutral rate.
As a result of weak aggregate demand, the decrease in the imported inflation and the dissipation of the base effect the annual inflation is currently at a low level. The annual growth in consumer prices equaled 1.8% in December 2016.
Positive tendencies have been observed in export developments. As a result of improved external demand growth rate of registered goods exports became positive in Q4 2016. However imports have increased as well, contributing to worsened net exports. Tourism revenues are also continuing to grow. Remittances have also increased compared to 2015.
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 price stability in the country.
The next meeting of the Monetary Policy Committee will be held on March 7, 2017."