The National Bank of Georgia (NBG) raised its refinancing rate by 50 basis points to 7.0 percent, saying the impact of the exchange rate depreciation on inflation had increased recently and this was now exacerbating inflationary expectations.
The rate hike by NBG comes as inflation has begun to accelerate following a steady fall in the lari since February and after the central bank cut its rate twice this year in January and March by a total of 50 basis points.
Georgia's inflation rate rose to 4.9 percent in July from 4.6 percent in June and only 2.2 percent in January, boosted by higher taxes on cigarettes. Core inflation, which excludes food, energy and tobacco, is still low at 2.4 percent, indicating weakening demand-side pressures, NBG said.
The lari has been falling since mid-February and was trading at 2.96 to the U.S. dollar today, down 9.5 percent since the start of this year.
The central bank said it would "use all available means to ensure price stability" and if necessary its monetary policy committee would consider meeting at an extraordinary session. Its next meeting is scheduled for Oct. 23.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on September 4, 2019 and decided to raise the refinancing rate by 0.5 percentage points to 7 percent.
In August, annual inflation rate stood at 4.9 percent. Overshooting the target was caused by several factors. One-off factors, such as increase in excise tax on cigarettes (contribution of 0.8 percentage points), remain one of the major contributors to high inflation. Moreover, the pass through of the exchange rate depriciation to inflation increased in recent periods. It should be noted that the core inflation which excludes food, energy and tobacco prices, is still low at 2.4 percent indicating that the demand-side pressure on inflation is low.
Present depreciation of the nominal effective exchange rate is amplifying inflation expectations. In line with the previous decision of the MPC meeting, stating that if inflationary pressure driven by the exchange rate depreciation persisted, the Committee would consider monetary policy tightening, the Monetary Policy Committee decided to increase the policy rate by 0.5 percentage points. Moreover, the Committee stands ready to further continue policy tightening until the pressures from exchange rate recedes.
Preliminary data indicated improved economic growth. Nevertheless, aggregate demand remains below the potential, partially offseting pressures from exchange rate. According to the forecast, other things equal the inflation will remain above the target during this year, will start to decline from March, 2020 and stay close to target in the medium term.
According to preminary indicators, export of goods increased considerably (12.4 percent) during Janury-July 2019. Remittance inflows increased moderately (7.8 percent) during the same period. Against the background of the ban on air travel from Russian Federation, revenues from international travelers declined in July, as expected. Overall, during January-July, this indicator grew by 2.1 percent as opposed to 7.0 percent in the first half of the year. Despite this, total inflows continue to grow and further reduction in the current account deficit is expected in 2019.
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 is scheduled on October 23, 2019. However, if necessary, the Committee will consider the possibility of extraordinary meeting."
www.CentralBankNews.info
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