Georgia's central bank kept its benchmark refinancing rate at 7.0 percent, expecting inflation to fluctuate around the target, and said the speed of the planned easing of monetary policy depends on how fast the output gap closes and how strongly the recent rise in regional macroeconomic risks are transmitted to the country's economy.
The National Bank of Georgia (NBG), which has maintained its rate since July when it began a gradual easing by cutting the rate by 25 basis points, reiterated the process of normalizing its policy would be slow and inflation is still not affected by the possible transmission of regional risks.
Georgia's inflation rate decelerated to a 2018-low of 1.9 percent in November from 2.3 percent in October and NBG confirmed it expects inflation to remain around its 3.0 percent target.
Georgia's economy has been expanding strongly since early 2017 and in the second quarter of this year gross domestic product grew an annual 5.5 percent, up from 5.3 percent in the first quarter and the fastest rate of growth since third quarter of 2014.
The central bank said positive trends in the external sector were continuing, with growth in exports up 25 percent year-on-year in the first 10 months of the year, tourism revenue up 20 percent and remittances from abroad up around 16 percent.
"In the recent months leading indicators have been pointed to the acceleration in economic growth," NBG said.
In October the International Monetary Fund (IMF) completed its third successful review of Georgia's reform program which is expected to result in the release of another US$41.6 million, bringing total funds to $166.4 million.
While the IMF said the country's reform program was advancing well, it noted that economic growth was softening in Georgia's main trading partners and lowered its 2018 growth forecast to 5.0 percent from 5.5 percent and forecast 2019 growth of 4.6 percent.
The NBG's monetary policy stance was "adequate," IMF said, adding inflation was expected to remain in line with the target and a flexible exchange rate was "pivotal to protect Georgia against external risks."
Georgia's lari fell sharply late last year until a rate hike in December stopped the decline and reversed it, pushing up the exchange rate until April this year. Since then the lari has eased against the U.S. dollar, in line with most other currencies though it has firmed in the last month.
Today the lari was trading at 2.66 to the dollar, down 1.9 percent this year.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on December 12, 2018 and decided to keep the refinancing rate unchanged at 7.00 percent.
The annual inflation has decreased in the beginning of 2018 and, in line with forecasts, remains mostly below the target rate of 3%. In November the annual inflation stood at 1.9%. According to current forecast, other things equal the inflation will fluctuate around the target rate in the medium term.
In July 2018 the NBG started the gradual easing of the monetary policy. As declared on the previous MPC meetings this normalization process will be slow, taking into account the possible transmission of regional risks on inflation. In spite of the decrease in the macroeconomic risks coming from the external sector, the inflation forecast is still affected by uncertainties. Hence the MPC decided to keep the policy rate unchanged at this stage. The speed of normalization will depend on how fast the output gap will close on one hand and how strongly the increased regional macroeconomic risks will be transmitted to Georgian economy – on the other.
The positive trends in the external sector have been maintained. Goods export annual growth rate in the first ten months of 2018 was 25% whereas the tourism revenues have grown by 20% in the same period. The positive trend has continued in the growth of the remittances from abroad – 16% annually. The credit growth is high as well, supporting the aggregate demand. In the recent month leading indicators have been pointing to the acceleration in economic growth.
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 January 30, 2019.
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