Georgia's central bank maintained its refinancing rate at 4.50 percent, saying it expects a certain increase in the inflation rate in coming months due to the depreciation of the lari currency that will raise the costs of U.S. dollar-denominated debt.
But considering that both external and domestic demand has weakened significantly, the National Bank of Georgia (NBG) expects any increase in inflation to be of a short-term nature and therefore not increase inflationary risks.
The NBG, which raised its rate by 50 basis points in February, said it would continue a "phased exit out of accommodative monetary policy" as the domestic and external economic situation improves.
The Georgian central bank embarked on a tightening cycle in February 2014 but then had to pause until last month due to the risks from the Russian conflict with Ukraine. Georgia borders the Black Sea to the west, Russia to the north, and Turkey and Azerbaijan to the south.
The lari started depreciating sharply against the U.S. dollar in November 2014 and hit a low of 2.3 by Feb. 24, down 18 percent since the start of 2015. Since then it has recovered to trade at 2.25 to the dollar today, down 16.4 percent this year.
Last month the central bank's governor, Georgy Kadagidze, said the country's banks may restructure dollar loans to help soften the impact of the lari's depreciation. Economists have said more than 60 percent of Georgian banks' loan portfolios are denominated in foreign currency.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on March 25, 2015 and decided to keep the refinancing rate unchanged at 4.5 percent.
The monetary policy decision is based on the macroeconomic forecast, according to which the risks and expectations affecting the forecast inflation have risen due to external shocks. Despite the appreciation of GEL nominal effective exchange rate, the recent depreciation of GEL vs USD has been reflected in the increase in the intermediate costs related to USD-denominated debt service. Hence certain increase in the inflation rate is expected in the coming months. Taking into account that both external and domestic demand have significantly weakened, the Monetary Policy Committee considers the impact of the aforementioned factors on the inflation to be short-term in nature and these factor will not give rise to inflation risks in the medium term. Therefore, the Monetary Policy Committee considers necessary to keep the monetary policy rate unchanged. The phased exit out of accommodative monetary policy will be implemented together with improvement in domestic and external economic situation.
According to existing forecasts by the end of 2015 inflation will remain within 5%. Annual inflation in February was 1.3%. The forecasts significantly depend on exogenous factors and contain risks of changing in both directions.
The deterioration in economic trends in our main trade partners continues to affect negatively Georgian economy. In January and February merchandise exports, remittances and tourism inflows all decreased. The domestic demand has also weakened due to the increase in USD-denominated debt service costs. Hence both domestic and external demand has decreased. The output gap remains negative. The change in the exchange rate caused by the decrease in foreign currency inflows is probably sufficient to decrease import demand, which in turn will assist to restore external balance. Based on the aforementioned the aggregate demand is expected to be weak during the year and not to create inflationary pressure from demand side.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal to ensure price stability. The dynamics of further changes in monetary policy will depend on the dynamics of expected inflation, tendencies in economic growth, global and regional economic environment.
The next meeting of the Monetary Policy Committee will be held on May 6, 2015."
www.CentralBankNews.info
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