Wednesday, June 24, 2020

Georgia cuts rate 2nd time as inflation outlook lowered

     Georgia's central bank lowered its benchmark policy rate for the second time this year as it continues to gradually exit from a tight monetary policy stance as the significant weakening of external and domestic demand is leading to a lower inflation forecast.
     The National Bank of Georgia (NBG) cut its refinancing rate by another 25 basis points to 8.25 percent and has now cut it 75 points this year following a 50-point cut in April.
     Despite today's rate cut, NBG said its monetary policy remains tight to ensure inflation returns to its target, adding "the pace of further policy normalization will depend on how quick inflation expectations recede."
     The central bank began tightening its policy stance in September last year to curb inflation from a decline in the lari's exchange rate, hiking its rate four times by a total of 200 basis points. 
     These rate hikes helped the lari rebound but on March 19, the day after it kept its rate steady amid a massive spree of rate cuts worldwide in response to the hit to economic activity from measures to contain the Covid-19 pandemic, the lari plunged. 
      By March 27 the lari had lost some 21 percent of its value, forcing the central bank to intervene in the foreign exchange market. NBG has intervened 6 times in the market totaling $180 million.
      This intervention helped calm the market and on April 8 NBG announced a series of emergency measures in response to the pandemic, including the provision of $400 million through swaps to commercial banks and microfinance institutions, allowing banks to use foreign currency buffers to manage lari liquidity and an easing of banks' capital requirements.
      Today the lari was trading at 3.05 to the U.S. dollar, up almost 15 percent since the low of 3.50 on March 27 but still down 6.2 percent since the start of this year.
     Georgia's inflation rate eased to 6.5 percent in May from 6.9 percent in April, but is still above NGB's target of 3.0 percent.
     The central bank confirmed its view from April that it expects inflation to gradually decline over the rest of this year and reach its target level in the first half of 2021 as the impact of higher costs of some goods and services in connection with measures to prevent the spread of Covid-19 only affects inflation in the short term.
      The impact of weaker external and domestic demand, however, will have a longer lasting impact on inflation though it cautioned that above-target inflation has the risk of stoking inflation expectations.
     "Taking these factors into account, the Monetary Policy Committee deemed it appropriate to continue the gradual exit from the tightened monetary policy stance and reduced the rate by 0.25 percentage points," NBG said.
      Preliminary data show mixed signals regarding the expected drop in demand, the central bank said, adding significant fiscal stimulus is also expected to boost demand.
       Current estimates show a 16.6 percent year-on-year fall in economic activity in April while payment card transactions in May rose 21 percent from the previous month, though it was still negative in annual term.
      And high growth of cash in circulation points to increased economic activity and there has been an improvement in credit activity in the wake of a gradual lifting of restrictions.
    On May 1 the International Monetary Fund's executive board raised Georgia's access to its extended fund facility (EFF) to 230 percent of its quota, releasing some US$200 million to help the country meet urgent balance of payments and fiscal needs, including higher spending on health. This brought the IMF's total disbursements under the 3-year EFF to some US$448 million.
     "The COVID-19 pandemic has hit the Georgian economy hard," IMF said, noting a fall in external demand and tourism has widened the current account and fiscal deficits, depreciated the exchange rate and led to a substantial decline in economic activity.
     The IMF also supported NBG's "moderately tight monetary policy," while allowing the exchange rate to remain flexible, adding monetary policy decisions should be based on monitoring inflation expectations.
    The IMF forecast Georgia's economy would contract 4.0 percent this year, down from 5.1 percent growth last year, and then expand 4.0 percent in 2021.
     Inflation is seen averaging 4.7 percent this year, slightly up from 4.5 percent in 2019, and then easing to 3.9 percent in 2021.
     Measured in lari, Georgia's current account deficit is seen widening to 11.3 percent of GDP, up from a 4.9 percent in 2019, and then narrowing to 7.5 percent in 2021. In U.S. dollar terms, the deficit this year is seen widening to 1.7 percent of GDP and then 1.3 percent in 2021.

     The National Bank of Georgia issued the following statement:

"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on June 24, 2020, and decided to cut the refinancing rate by 0.25 percentage points to 8.25 percent.
In May, annual inflation stood at 6.5 percent. According to the NBG forecasts, inflation will continue to gradually decline over the rest of the year and will reach the target level in the first half of 2021. The inflation dynamics will be determined by the interaction of both demand and supply side factors. On the one hand, the Covid-19 prevention measures led to an increase in the cost of supply of some goods and services. However, the increase in costs has only a short-term effect on inflation rate. On the other hand, the impact of significantly weaker external and domestic demand on inflation will last longer, leading to a reduction in inflation forecasts. At the same time, it should be noted that above target inflation in a long-term creates the risks of rising inflation expectations. Taking these factors into account, the Monetary Policy Committee deemed it appropriate to contiსnue the gradual exit from the tightened monetary policy stance and reduced the rate by 0.25 percentage points. Despite the decline, monetary policy remains tight, ensuring a return of inflation to its target level in the medium term. The pace of further policy normalization will depend on how quickly inflation expectations recede.
Preliminary indicators produce mixed signals regarding the expected reduction in aggregate demand. According to current estimates, economic activity in April fell by 16.6 percent annually. At the same time, in May, compared to the previous month, the volume of transactions with payment cards increased by 21 percent, although the annual growth rate is still negative. On the other hand, high annual growth of cash in circulation points to increased economic activity. At the same time, in the wake of the gradual lifting of restrictions, some improvement in credit activity has been observed. All these factors reveal that there is quite some uncertainty about the scale of the expected decline in aggregate demand. In addition, over the year the aggregate demand is expected to be positively impacted by significant fiscal stimulus, including planned partial subsidies on interest charges for mortgage loans. The latter is, in fact, equivalent to additional easing of monetary policy stance.
According to forecasts, as a result of the economic downturn in trading partner countries, external demand will remain significantly weakened throughout the year. According to preliminary data, exports of goods in May declined by 31 percent annually, while the tourism revenues fell by 97 percent. Along with the decline in revenues from exports, imports in May also fell by 34 percent year on year.
The NBG will continue to monitor the developments in the economy and financial markets and will use all instruments at its disposal in order to ensure the price stability.

The next meeting of the Monetary Policy Committee is scheduled on August 5, 2020."


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