The National Bank of Georgia (NBG) kept its key refinancing rate unchanged at 7%, after increasing it by 25 basis points last month.
NBG said in a statement on June 14, that “the decision is based on macroeconomic forecasts,” according to which, it expects that this year’s inflation rate “will be above its target, due to the supply side pressures.”
“In the last few months, as a result of one-off effects, the inflation rate increased and reached 6.6% in May,” the regulator said, adding that price increase on tobacco products and fuels accounted for 2.6% share of the change.
NBG however, added that the inflation rate increase “is in line with the current forecast,” according to which, “the increase is temporary, [the inflation rate] will experience decline in the second half of 2017 and will get close to its target rate in 2018.” At the same time, the Bank added, “inflation expectations have exhibited a tendency of decline.”
“All other things being equal, further tightening of the key rate is not expected. Along with the absence of additional shocks and the expiration of one-off factors affecting inflation, it is expected that the key rate will gradually return to its neutral level in the medium term,” the National Bank said.
“Factors affecting the demand side of the consumer prices are still weak and the GDP growth is below its potential level. Indicators of aggregate demand are returning varied signals: on the one hand, in April, based on preliminary assessment, economic growth has declined compared to previous months, and on the other, revenues from export, including from tourism are increasing at a high pace. Moreover, the volume of remittances is growing,” the statement also reads.
The National Bank then noted that it expects gradual decrease of current account if external demand continues increasing.
“The National Bank of Georgia will monitor the developments in the economy and financial markets and will use all available instruments at its disposal to ensure the price stability,” the regulator added.
NBG started tightening its monetary policy from February 2015 pushing the key refinancing rate from 4% in February up to 8% by the end of the year. The rate remained unchanged at 8% in the first three months of 2016 but went through gradual easing beginning from April and remained unchanged at 6.5% until January, 2017. The National Bank of Georgia increased the key rate to 6.75% on January 25 and to 7% on May 2.
The next meeting of NBG’s monetary policy committee has been scheduled for July 26, 2017.