In May the National Bank of Georgia (NBG) raised its rate for the second time this year - for total hikes of 50 basis points - but said further rate increases were not expected as inflation was expected to decline to its target level in 2018.
The central bank today confirmed it still expects inflation to remain above its target this year due to supply side pressures, with a rise in tobacco products and fuel pushing up inflation in May by 2.6 percentage points to 6.6 percent from 6.1 percent in April.
This rise in inflation, however, is temporary and inflation should start decelerating in the second half of this year and then reach the target in 2018.
This year NBG 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.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on June 14, 2017 and decided to keep the refinancing rate unchanged at 7 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. In the recent months, due to one-time factors the inflation has risen and reached 6.6% in May, with the contribution of rise in the prices of tobacco products and fuel equaling 2.6 p.p. The rise in inflation is in accord with the existing forecast, according to which the rise in inflation will be temporary and inflation will start decreasing in the second half of the year, reaching the target in 2018. At the same time the inflation expectations have been declining lately. Hence, other things equal there is no need of the further policy tightening. Given the absence of additional shocks and with the elimination of the impact of the one-time factors affecting the inflation, the policy rate in the medium term is expected to decrease to its neutral level in the medium term.
This year the demand factors affecting consumer prices are still weak and the GDP growth is below the potential. Lately the aggregate demand indicators have been sending mixed signals: on one hand according to the preliminary estimates the economic growth has slowed down in April, compared to the previous months; on the other hand the export revenues (including that from tourism) have been growing at a high rate. The volume of remittances has also been growing. If the growth trend in the external demand is maintained, the gradual decrease in the current account deficit can be expected.
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 July 26, 2017. "
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