The National Bank of Georgia (NBG), which has now raised its rate by 100 basis points this year after a rate hike in February, added the rate for standing refinancing loans would be increased to 150 basis points above the 5.0 percent policy rate.
Depreciation of the lari's exchange rate has raised the cost of servicing U.S.-dollar denominated debt and also pushed up inflation expectations, the NBG said, forecasting that inflation will continue to grow at moderate speed and reach the bank's 5.0 percent target by the end of this year.
The inflation rate of Georgia, which borders the Black Sea to the west, Russia to the north, and Turkey and Azerbaijan to the south, eased to 2.5 percent in April from 2.6 percent in March.
The lari started depreciating against the U.S. dollar in November 2014, dragged down by Russia's economic crisis - and was trading at 2.325 to the dollar today, down 19 percent since the start of the year.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on May 6, 2015 and decided to increase the refinancing rate by 50 basis points to 5 percent. At the same time the interest rate for the standing refinancing loans increases to policy rate plus 150 basis points.
Due to GEL depreciation the inflation expectations have risen, which can be reflected in the risks of the inflation deviating from its target level in the medium term. Given the aforementioned the Monetary Policy Committee considers necessary to increase the monetary policy rate gradually to 5.5 percent by the end of the year.
Annual inflation in April was 2.5%. The impact on the inflation of the increase in intermediate costs related to the service of foreign currency-denominated debts (due to the GEL depreciation) was partially balanced by the decrease in fuel prices. The deterioration in economic trends in our main trade partners continues to affect negatively Georgian economy. Goods export, remittances and tourism inflows have all decreased. However the recent changes in the exchange rate have already started to affect the import demand, which in turn ensures the adjustment of external imbalance and fosters domestic demand.
According to preliminary information the economic activity in the first quarter was higher than forecast. Despite that, the loan growth has significantly slowed down in April. According to current forecast the inflation will grow at a moderate speed and will reach its 5% target value by the end of 2015.
According to preliminary information the economic activity in the first quarter was higher than forecast. Despite that, the loan growth has significantly slowed down in April. According to current forecast the inflation will grow at a moderate speed and will reach its 5% target value by the end of 2015.
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 July 1, 2015."
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