Central Bank Holds Key Rate at 11%
The Monetary Policy Committee of the National Bank of Georgia (NBG) on December 21 kept the refinancing rate unchanged at 11%.
In its decision, the NBG noted that given current geopolitical circumstances, uncertainty is still high and even though inflation in Georgia has already retreated from its peak, risks to inflation are [still] mostly on the upside.
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Also, the NBG says inflation has long deviated away from its target level which further amplifies inflation expectations and creates risks that nominal wage growth may significantly exceed the productivity growth. “Inflationary effects stemming from demand are also noteworthy,” the central bank added.
The central bank emphasizes the Russia-Ukraine war and the accompanying sanctions imposed on Russia which have significantly increased migration flows into Georgia, and boosted aggregate demand. As a result, “economic activity continues to be strong.”
“According to the NBG’s estimates, the current level of economic activity exceeds its potential level, which hinders the slowdown in inflation even with the strengthening of the lari exchange rate as a result of foreign inflows,” the central bank said.
In response to these risks, the NBG maintains a tight monetary policy. “As a result of the tight monetary policy and the recently implemented macroprudential measures, credit growth continued to decelerate. It is expected that these dynamics will persist in the future.”
The central bank also says that “the gradual tightening of monetary policies by the European Central Bank and the Federal Reserve further strengthens the effects of the policy tightening on foreign currency loans in Georgia.” According to the NBG, the announced increase in the countercyclical capital buffer will also have a tightening effect on credit activity and the fiscal deficit is shrinking as well.
“The combination of these factors will neutralize demand-side inflationary pressures, which will help inflation decelerate. It is expected that the annual inflation will continue a gradual decline and will approach the target level in the second half of 2023,” the NBG added.
The next meeting of the Monetary Policy Committee will be held on February 1, 2023.
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