Georgia maintains rate, exit from easy policy to take time

    Georgia's central bank maintained its monetary policy rate at 4.0 percent and said an exit from its accommodative policy stance is still necessary but "recent forecasts suggest that the process will take more time than originally predicted."
    The National Bank of Georgia (NBG) began tightening policy in February when it rates its policy rate by 25 basis points, but since then "certain risks have materialized that have caused insufficient growth of both domestic and external demand, thus slowing the process of inflation reaching its medium term target."
    "The dynamics of further monetary policy changes will depend on the dynamics of expected inflation, tendencies of economic growth, and the global and regional economic environment," the central bank said.
    Among the risks that central bank has faced in tightening policy its the fallout from the conflict between Russia and Ukraine. Georgia borders the Black Sea to the west, Russia to the north and Turkey and Azerbaijan to the south.
    The central bank forecast that inflation will gradually reach 4.0 percent by the end of this year and reach the bank's target of 5.0 percent in the first half of 2015.

    Georgia's inflation rate rose to 2.85 percent in July from 2.0 percent in June, slightly below expectations. In 2013 the central bank cut its policy rate by 150 basis points as it experienced deflation in most of 2012 and 2013.
    An exit from its current accommodative policy stance is not considered to limit economic activity as the policy rate will remain below a neutral level, the bank said.
    "So long as new information revealed in coming periods does not affect the current forecasts and no new shocks to the economy materialize, the policy rate, along with the revival of economic growth, will gradually approach its neutral level and reach 6.0% by the end of 2015," the bank said.
    Georgia's Gross Domestic Product grew by 6 percent in the first half of the year, mostly driven by domestic demand, the bank said. External demand remains weak, illustrated by low exports in July and external demand remains a risk factor in light of the regional situation.
    "In the event of a further decrease, this will push down both economic growth and inflation," the central bank said about external demand.
    The International Monetary Fund forecast growth this year of 5.0 percent and the same in 2015, up from 3.2 percent in 2013. Inflation is forecast to average 4.6 percent in 2014 and 4.9 percent in 2015 up from deflation of 0.5 percent in 2013 and 0.9 percent in 2012.

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