Tuesday, May 2, 2017

Georgia raises rate 25 bps but sees no further hikes

    Georgia's central bank raised its benchmark refinancing rate by another 25 basis points to 7.0 percent, as expected, but said further rate increases were not anticipated as inflation is expected to decline to its target level in 2018 and the policy rate to slowly decline to its neutral level.
     Today's rate hike comes after the National Bank of Georgia (NBG) in January said it considered it necessary to raise the rate to 7.0 percent to curb inflationary expectations from higher inflation. It March the NBG confirmed it planned to raise the rate to 7 percent but held off from raising the rate that month to be sure the economy was developing in line with its forecast.
      The central bank has now raised its rate twice this year by a total of 50 basis points following four rate cuts last year by a total of 150 basis points.
       As in January, the central bank said the rate increase was aimed at controlling inflation expectations and based on its forecast that inflation would remain above its target this year due to one-time factors, such as higher excise taxes and last year's depreciation of the lari's exchange rate.
     "Nevertheless, once the effect of one-time factors affecting CPI inflation is exhausted, the inflation rate is expected to decline to its target level in 2018," the NBG said, adding" Other things equal this year, a further increase in the policy rate is not expected."
     Georgia's inflation rate eased to 5.4 percent in March from 5.5 percent in February and this year the central bank targets inflation of 4.0 percent, down from its 2016 target of 5.0 percent. For 2018 the NBG will lower the target further to 3.0 percent, the rate it considers the long-run rate.
    Georgia, which is located in the Caucasus region and borders Russia to the north, saw its lari depreciate by 24 percent in the second half of 2016 to a record low of 2.80 to the U.S. dollar on Dec. 20, 2016, pushing up inflation. This followed a 21 percent fall in the lari in 2015.
    But since then the lari has strengthened and was trading at 2.44 to the dollar today, up 9 percent since the start of this year on growing confidence in the country's economy.
     The central bank is also introducing deposit insurance to strengthen the financial safety net and taking steps to strengthen the financial sector and de-dollarize the economy further.
     Although economic activity is improving, the central bank said demand is still weak - keeping consumer prices down - with first quarter economic growth of 5.0 percent as external demand has surged, boosting revenue from tourism and exports. Remittances have also risen, it added.
     Last year Georgia's economy grew by 2.7 percent due to slow growth among its key trading partners of Russia and Turkey, pushing up the fiscal deficit and current account deficit.
      But last month the International Monetary Fund (IMF) approved a 3-year fund facility of US$285.3 million to bolster the government's economic reforms, such as improving education, infrastructure, public administration and the private sector as a growth engine.
      The IMF projects growth this year of 3.5 percent and inflation above the 4.0 percent target due to the lagged effect of exchange rate depreciation, higher commodity prices and taxes increases.
     As a sign of investors' confidence in Georgia and its currency, the European Bank for Reconstruction and Development (EBRD) last month issued its first ever Eurobond that was both denominated and settled in lari.
     In a move that should help increase the attractiveness of Georgian capital markets, the EBRD will apply for the 5-year bonds, which carry a 7.5 percent interest rate, to be listed on the London Stock Exchange. The EBRD has invested a total of 3.1 billion euros in projects in Georgia.

    The National Bank of Georgia issued the following statement:

"The Monetary Policy Committee of the National Bank of Georgia met on May 2, 2017 and made the decision to increase the refinancing rate by 25 basis points to 7.0 percent.
The decision is based on the macroeconomic forecast, according to which, due to the supply side pressures, the inflation is expected to be above its target rate during 2017. Nevertheless, once the effect of one-time factors affecting CPI inflation is exhausted, the inflation rate is expected to decline at its target level in 2018. Moreover, by increasing the policy rate, the National Bank of Georgia intends to control the inflation expectations. Other things equal this year, a further increase in the policy rate is not expected. With the elimination of the impact of the aforementioned one-time factors, the inflation will start declining and will stay close to the target in the medium term; the policy rate in the medium term is expected to gradually decrease to its neutral level.
This year, the factors affecting the demand side of the consumer prices are still weak, although the economic activity has improved. According to preliminary estimates, economic growth in the first quarter is 5.0 percent. Following the economic recovery of the main trading partners, the external demand has surged, significantly increasing the revenues from tourism and exports. Moreover, compared to the previous year, the volume of remittances has grown.
The NBG will continue to monitor the developments in the economy and financial markets and will use all available  instruments at its disposal to ensure the price stability.
The new monetary policy rate will be effective from 4th of May, 2017.
The next meeting of the Monetary Policy Committee will be held on June 14th, 2017."


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