Wednesday, August 4, 2021

Georgia raises rate 3rd time, to maintain tight policy

      Georgia's central bank raised its key interest rate for the third time this year to the highest level in 13 years, saying it wants to prevent high inflation expectations from becoming entrenched and "will maintain contractionary policy for a protracted period of time and/or will tighten further, if necessary."
     The National Bank of Georgia (NBG) raised its monetary policy rate by another 50 basis points to 10.0 percent and has now raised it 2 percentage points following earlier rate hikes in March and April, more than fully unwinding the 1 percentage point rate cuts last year in response to the COVID-19 pandemic.
     The policy rate has not been this high since October 2008 with the rate since then gradually falling to a low of 3.75 percent in August 2013 before gradually climbing back to the current level.
     Today's rate hike comes after Georgia's inflation rate jumped to a higher-than-forecast 11.9 percent in July, the highest since May 2011, and well in excess of the bank's target of 3.0 percent.
      This rise in July inflation clearly took the central bank by surprise as in its June policy statement it expected inflation to peak in June and then average 7 percent this year.
     "High inflation has been a global challenge recently and price growth in July exceeded forecasts in many counties," the bank said, pointing to higher food, oil and shipping costs that impact import prices.
     The cost of imported products rose 18.4 percent in July, topping a 7.2 percent rise in domestic prices.
     Today the central bank raised its inflation forecast sharply and now expects inflation to average over 9 percent this year compared with 5.2 percent last year.
     Although the central bank still believes the forces that have pushed up inflation are mainly one-off and independent from monetary policy - such as higher utility bills - it is clearly very concerned high inflation expectations will become entrenched and thus keep inflation at a higher level for longer time.
     Helped by its tight monetary policy and the fading of one-off factors that have pushed up inflation to a decade high, the central bank projects inflation will ease in 2022 and gradually return to its target.
     In addition to high import prices, economic activity in Georgia has bounced back rapidly from the pandemic, with the economy expanding an annual 18.7 percent year-on-year in June after a 25.8 percent expansion in May for the third fastest growth on record.
     In the first half of this year NBG said the economy grew 12.7 percent and raised its forecast for growth this year to average 8.5 percent after a contraction of 6.2 percent last year.
     Last month the International Monetary Fund (IMF) said Georgia's economic recovery had "gained impressive momentum" and forecast growth this year of 7.7 percent and 5.8 percent in 2022.
     Forecasting inflation of 7.3 percent this year, the IMF also said monetary policy should guard against temporarily high inflation becoming entrenched and with inflation risks tilted to the upside, the central bank should be ready "to promptly hike rates further if inflation expectations or core inflation suggest high inflation risks becoming entrenched."
      Georgia's economy is also benefitting from growing international demand but NBG said it still remains below pre-pandemic levels when taking into account the tourism sector.
     Revenue from international travelers soared 11 times in June but is still 64 percent below the level seen in June 2019.

"The National Bank of Georgia raises the monetary policy rate by 0.5 percentage points to 10.0 percent 

On August 4, 2021, the Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) decided to increase the refinancing rate by 0.5 percentage points. The monetary policy rate was set at 10.0 percent.

 High inflation has been a global challenge recently and price growth in July exceeded forecasts in many countries. Georgia's annual inflation came out unexpectedly high as well at 11.9 percent in July. The driving forces of high inflation are predominately one-off and independent from monetary policy. The major ones are the sharply increased prices of food and oil in international markets. In addition, international shipping costs have increased significantly, which also affects prices of imported goods. According to the July data, prices of imported products increased by 18.4 percent in July, which is significantly higher than the increase in prices of domestic products (7.2 percent). It is noteworthy that recently there has been some reduction in the prices of a number of food products in international markets, and if this trend persists it should positively affect the local markets as well after some period. 

Utility bills are notable among the one-off local factors, contributing 1.7 percentage points to annual inflation. In addition to the temporary factors mentioned above, domestic demand has significantly increased - economic growth was 12.7 percent in the first half of the year and for 2021 the growth projection was revised upwards to 8.5 percent. At the same time, while strong fiscal stimulus is maintained, the current level of lending growth is higher than desired. Based on the updated data, the short-term inflation forecast has increased considerably compared to the previous forecasts, and it is expected that inflation in 2021, other things being equal, on average will be higher than 9 percent.

In order to ensure that recent price increases – even if driven by temporary factors – do not result in high inflation expectations becoming entrenched, the NBG will maintain contractionary policy for a protracted period of time and/or will tighten it further, if necessary. With such a policy and the expected fade-out of one-off exogenous factors, inflation is projected to decline in 2022 and gradually approach its medium-term target of 3 percent. 

External demand continues to grow. However, on aggregate – taking into account the tourism sector - it remains below the pre-pandemic levels. According to the preliminary data, exports of goods increased by 30 percent year-on-year in June and is 13 percent higher compared to June 2019. Revenues from international travelers increased 11 times year-on-year in June, however the decline is 64 percent compared to the same period in 2019. As for the imports of goods, an annual growth of 37 percent was recorded in June, whereas compared to June 2019 imports grew by 13 percent. 

The NBG continuously monitors the developments in the economy and financial markets and will use all available tools to ensure price stability. The next meeting of the Monetary Policy Committee will be held on September 15, 2021."


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