The National Bank of Georgia (NBG), which has now raised its rate by 400 basis points this year, said it was currently forecasting that inflation will remain above the bank's target early next year but then start to gradually fall and return to the 5.0 percent target in the second half of 2016.
Georgia's inflation rate rose to a 2015-high of 6.3 percent in November from 5.8 percent in October on higher costs of production and imported prices.
However, the central bank added that a one-time increase in electricity tariffs had an "important impact" on inflation and weak demand and lower world prices of oil and food held back inflation.
The depreciation of the exchange rate of the lari, which has lowered foreign currency inflows, has helped push down imports by 18 percent over the last three months, reducing the external imbalance.
"We can assume that the impact of the existing external shock on the exchange rate has been exhausted," the NBG said, adding that "other things being equal no additional pressure can be expected on the exchange rate coming from the existing external shock."
The exchange rate of Georgia's lari has been falling sharply since late 2014 but has stabilized since early October and was trading at 2.39 to the U.S. dollar today, up from 2.44 in mid-September, but still down 21 percent year-to-date.
Earlier this month the central bank said its foreign exchange reserves, which have been depleted from foreign exchange market intervention, had risen to $2.479 billion as of Nov. 30 from $2.449 billion a month earlier.
In the second quarter of this year, Georgia's economy was in line with the central bank's expectation and it estimated growth in the first 10 months of 2.8 percent. In the second quarter Gross Domestic Product was up by an annual 2.5 percent, below the first quarter's 3.2 percent.
Holding back growth was exports while domestic demand is also negatively affected by the decline in remittances and the rise in the cost of servicing foreign currency loans from the fall in the lari.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on December 16, 2015 and decided to increase the refinancing rate by 50 basis points to 8.0 percent.
The monetary policy decision is based on the macroeconomic forecast, according to which the tightening of the monetary policy by the National Bank of Georgia must have positive effect on the decrease in inflation expectations. Unless other additional shocks take place, further monetary tightening in the coming periods is not to be expected. According to the current forecast, in the beginning of 2016 the inflation will remain above its target value, will start gradual decreasing afterwards and will return to its target value of 5% in the second half of 2016.
The annual growth in consumer prices equaled 6.3% in November. The main factors causing rise in inflation are still coming from the supply side, namely the increase in the intermediate costs of production and higher prices on certain imported goods. An important impact on the inflation came from the one-time increase in the electricity tariff. The rise in inflation has been limited by the weak aggregate demand and decrease in the world prices of oil and food products.
The monetary policy decision is based on the macroeconomic forecast, according to which the tightening of the monetary policy by the National Bank of Georgia must have positive effect on the decrease in inflation expectations. Unless other additional shocks take place, further monetary tightening in the coming periods is not to be expected. According to the current forecast, in the beginning of 2016 the inflation will remain above its target value, will start gradual decreasing afterwards and will return to its target value of 5% in the second half of 2016.
The annual growth in consumer prices equaled 6.3% in November. The main factors causing rise in inflation are still coming from the supply side, namely the increase in the intermediate costs of production and higher prices on certain imported goods. An important impact on the inflation came from the one-time increase in the electricity tariff. The rise in inflation has been limited by the weak aggregate demand and decrease in the world prices of oil and food products.
The real GDP growth in the second quarter was consistent with the forecasts. According to preliminary forecasts the real growth in the first 10 months of the year was 2.8%. The factor hindering the growth is the external sector, which, given the dire economic situation in the region negatively affects the income from export of goods and services. The economic growth in the past period was mostly due to the domestic demand, which is however negatively affected by the decline in remittances and increase in the service burden of foreign currency denominated loans due to the changes in the GEL/USD exchange rate.
There have been some positive developments in relation to the elimination of external imbalance. Given the decrease in foreign currency inflows the change in the exchange rate has caused import to adjust. In the last three months imports have decreased by 18 percent (excluding one-offs). Accordingly we can assume that the impact of the existing external shock on the exchange rate has been exhausted. Other things equal no additional pressure can be expected on the exchange rate coming from the existing external shock.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal in order to ensure the price stability. Further changes in monetary policy will depend on the inflation forecast and factors affecting it, global and regional economic environment and general economic conditions.
The next meeting of the Monetary Policy Committee will be held on February 3, 2016"
There have been some positive developments in relation to the elimination of external imbalance. Given the decrease in foreign currency inflows the change in the exchange rate has caused import to adjust. In the last three months imports have decreased by 18 percent (excluding one-offs). Accordingly we can assume that the impact of the existing external shock on the exchange rate has been exhausted. Other things equal no additional pressure can be expected on the exchange rate coming from the existing external shock.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal in order to ensure the price stability. Further changes in monetary policy will depend on the inflation forecast and factors affecting it, global and regional economic environment and general economic conditions.
The next meeting of the Monetary Policy Committee will be held on February 3, 2016"
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