Wednesday, October 25, 2017

Georgia maintains rate and still expects to cut to neutral

     Georgia's central bank left its benchmark refinancing rate at 7.0 percent and confirmed it still expects to reduce the rate gradually to a neutral level as long as there are no additional shocks to inflation.
      The National Bank of Georgia (NBG) also confirmed it expects inflation to remain above its 4.0 percent target by the end of this year and then decline to around its 2018 target of 3.0 percent at the beginning of next year as temporary factors abate.
      The NBG has raised its rate twice this year, most recently in May, by a total of 50 basis points. In September the central bank also said it expects to gradually lower the rate to neutral as inflation approaches its targets.
      Georgia's inflation rate has been boosted by higher taxes on tobacco and fuel but inflation is expected to drop once these price increases drop out of comparison.
      Inflation in September rose to 6.2 percent in September from 5.7 percent in August but the bank said third quarter inflation was slightly lower than forecast and inflation expectations had not changed and therefore didn't create any additional upward pressure.
       Helped by prudent policies, stronger economic activity in its main trading partners and support from the International Monetary Fund (IMF), Georgia's economy has expanded faster than expected this year and the NBG raised its 2017 growth forecast to 4.5 percent.
       Georgia's Gross Domestic Product grew by an annual rate of 4.7 percent in the second quarter of this year, down from 5.1 percent in the first quarter, but domestic demand and overall activity remain below potential and is not creating inflation pressure.
       Earlier this month the IMF revised upwards its 2017 growth forecast to 4.3 percent from a previous 3.5 percent, noting exports, tourism and investment.
       The central bank also said exports of goods and revenue from tourism were continuing to rise at high rates, with money transfers also rising and imports growing moderately.
       Rising foreign demand, along with a "competitive" exchange rate, will also be reflected in an improved current account deficit, the NBG added.
        The IMF forecast that Georgia's current account balance is expected to narrow to 10.4 percent of GDP in 2017 after 12.8 percent in 2016, with growth expected to strengthen in the medium term with continued implementation of economic reforms that should promote private investment, productivity growth and improve export competitiveness.
        In November the IMF's executive board is expected to make an additional US$42.3 million available to Georgia under its current facility, boosting total disbursements to $84.6 million. Earlier this month IMF staff and Georgian authorities agreed on the first review under the facility.
        The IMF's program aims to support Georgia's reforms to help generate higher and more inclusive economic growth and thus reduce economic and financial vulnerabilities.
        Following its review, the IMF also described Georgia's monetary policy stance as "adequate, and rightly focuses on price stability."
        It also agreed that inflation is expected to decline rapidly as the impact of higher taxes abates, and the flexible exchange rate regime "continues to protect the economy against external shocks."
        Georgia's lari, which fell from late 2014 through 2016, has trended firmer this year although it has dropped in the last week. Today the lari was trading at 2.55 to the U.S. dollar, up 4.3 percent this year.



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