The National Bank of Georgia (NBG), which last year raised its rate by 400 basis points, added that its tightening was being reflected in the economy with interest rates on lari-denominated loans rising and a decline in the growth of credit so demand will weaken further and push down inflation.
"Further changes in monetary policy will depend on the inflation forecast and factors affecting it, global and regional economic environment and general economic conditions," said the NBG.
The decision to maintain rates today follows the guidance by the central bank in December, when it raised the rate by 50 basis points but also said that further tightening was not to be expected and the increase in inflation from past depreciation of the lari's exchange rate was exhausted.
Georgia's inflation rate rose slightly to 5.6 percent in January from 4.9 percent in December, pushed up by an increase in electricity tariffs.
The central bank expects inflation to slightly exceed its target at the beginning of 2016 but then decline below 5 percent and staying close to its 5.0 percent target.
The lari started tumbling in November 2014 - it fell 22 percent against the U.S. dollar in 2015 - and has continued to decline this year, albeit at a slower pace. Today the lari was trading at 2.49 to the dollar, down 3.6 percent since the start of this year.
The fall in the exchange rate has affected imports, which fell by 15.3 percent in 2015, the central bank said, adding that "the impact of the external shock on the exchange rate has been exhausted" and "other things being equal no additional pressure can be expected on the exchange rate coming from the existing external shock."
Like many other former Soviet Union states, Russia is Georgia's main trading partner and its economy and currency has been dragged down by the fall in the ruble and Russia's economic crises.
Georgia's economy was estimated to have expanded by 2.8 percent in 2015, the central bank said, with the external sector hampering growth while domestic demand was supporting it though this was also affected by the decline in remittances from abroad and higher cost of servicing debt in foreign currency loans due to the fall in the lari's exchange rate.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on February 3, 2016 and decided to keep the refinancing rate at 8.0 percent.
The monetary policy decision is based on the macroeconomic forecast, according to which the tightening of monetary policy by the National Bank of Georgia during 2015 on the one hand will be reflected in the reduced inflation expectations as well as it will weaken inflationary pressure through constraining the aggregate demand. According to the current forecast, in the beginning of 2016 the inflation rate will slightly exceed inflation target; it will decline below 5 percent afterwards, although will remain close to target.
The y-o-y growth of consumer prices is 5.6% in January. The main factors of inflation are stemming from the supply side, namely the increase in the intermediate costs of production due to exchange rate depreciation 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 estimates the real growth in 2015 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 exports of goods and services. The economic growth in the past period was mostly driven by domestic demand, although the demand is negatively affected by the decline in remittances and increase in the debt service 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 2015 the import has decreased by 15.3 percent (excluding the one-offs). Accordingly based on our judgment the impact of the 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 tightening of the monetary policy in 2015 is partly reflected to the economy. Interest rates on lari denominated loans increased and as a result the growth of credit portfolio declined. This will be weakening aggregate demand further and will push inflation downwards. Thus, at this stage, there is no need for additional monetary tightening to contain inflation expectations, unless more shocks take place. Accordingly, taking into account external risks and domestic factors, the MPC finds it appropriate to leave the policy rate unchanged at 8.0 percent. 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 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.
The next meeting of the Monetary Policy Committee will be held on March 9, 2016."
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