The National Bank of Georgia (NBG) on April 28 raised the key refinancing rate by 100 basis points to 9.5%, at its 13-year highest, citing inflation pressure coming from high dollarization of the economy and exchange rate depreciation.
The Monetary Policy Committee said it expects the inflation rate to average at around 6.5% throughout 2021, before approaching the targetted 3%.
Among other key factors pressuring inflation upward, the policy-setting committee named high uncertainties in Georgia’s tourism industry, deteriorating epidemiological conditions, high budget deficit and recent developments in trade partner countries.
To combat the high dollarization, the central bank said from July it will begin setting the minimum reserve requirements on foreign currency deposits individually for each commercial bank. It said the ratio will remain at 25% for banks with deposit dollarization rate higher than 70%, while it will be reduced to 10% for those with a rate up to 40%. If a bank’s deposit dollarization lies within 40-70%, the reserve requirement will be decreased linearly from 25% to 10% in correspondence to a decrease in dollarization.
The policy-setting committee argued this will help increase demand for Georgian national currency, Lari, easing the depreciatory pressure on the foreign exchange market.
The Monetary Policy Committee convenes next on June 23.