By CentralBankNews.info
Georgia’s central bank kept its refinancing rate steady at 7.25 percent, saying further tightening of monetary policy was not necessary “at this stage” as the exchange rate of the lari had recently strengthened and inflation is forecast to decrease in the first months of this year.
A drop of almost 9 percent in the lari’s exchange rate from Oct. 22 to Nov. 19 led the National Bank of Georgia (NBG) to reverse course in December and raise its rate in contrast to its guidance from Oct. 25 that it expected to gradually reduce its rate to a neutral level.
On Dec. 13 the NBG raised its rate by 25 basis points to 7.25 percent and said “the magnitude and duration of further monetary policy tightening” would depend on how fast the pressure on prices from the exchange rate would decrease.
But after the lari started to fall in late October, the central bank began warning in November that it was ready to tighten its policy if the fall in the exchange rate posed a risk to inflation. It attributed to decline in the lari to speculation that the lari would be devalued.
The combination of verbal intervention and the December rate hike appears to have borne fruit, with the lari reversing course in early December.
Today the lari was trading at 2.50 to the U.S. dollar, up 3.6 percent since the start of this year and up 9.2 percent since the low on Nov. 19, 2017. Compared with the start of 2017, the lari is up 6.4 percent.
In today’s statement, the NBG’s monetary policy committee said the impact on inflation from the “significant deterioration” of the lari’s exchange rate had not yet been exhausted, adding the fall had not only raised pressure on inflation but also strengthened inflation expectations, necessitating its rate hike in December.
But current forecasts call for inflation to decline in the first months of this year and then be close to the bank’s 2018 target of 3.0 percent on average.
In December the International Monetary Fund forecast average 2018 inflation of 2.8 percent, with a rate of 3.2 percent end-year.
In December Georgia’s inflation rate eased to 6.7 percent from 6.9 percent in November, with a single exogenous factor that is not affected by monetary policy – a rise in taxes on tobacco and fuel – accounting for about 2.9 percent of the inflation rate.
This year the exogenous impact of higher electricity and water tariffs will add about 0.3 percentage points to inflation in January while the rise in oil prices in the second half of 2017 that continued this year will contribute to about 0.5 percentage points of inflation, NBG said.
Georgia’s current account deficit is expected to continue to improve this year, continuing last year’s trend as the export of goods improves, while revenue from tourism and money transfers rise.
A decline in the current deficit will also help reduce pressure on inflation from the exchange rate, the NBG added.
Georgia’s current account deficit narrowed to US$130.6 million in the third quarter of 2017 compared with a deficit of $344.16 in the same 2016 quarter for the smallest gap since the first quarter of 2005.
Last year the central bank’s reserves rose to US$3.39 billion, the highest since 2013.
Georgia holds rate, no more tightening necessary for now
January 31, 2018
