The National Bank of Georgia (NBG), which has maintained its rate after raising it by 25 basis points in December 2017 after a fall in the lari's exchange rate, said relatively higher volatility seen on international financial markets had increased the risk of a stronger transmission of inflationary pressures from its main trading partners.
The central bank acknowledged it was keeping a tight policy despite the fact that demand remains below the country's potential level of output, putting downward pressure on inflation.
The NBG's rate hike on Dec. 13 helped reverse a 9 percent fall in the lari from late October to mid-November, with the lari rising13.4 percent against the U.S. dollar between Dec. 1 and April 5.
Since then the lari has weakened and was trading at 2.46 today, down 2.8 percent since April 5. However, the lari still remains 5.3 percent higher than at the start of 2018.
Georgia's inflation rate declined at the start of this year as the impact of last year's hike in tobacco and fuel taxes dissipates and the central bank confirmed that it expects inflation to remain close to its target level of 3.0 percent this year.
In March headline inflation rose slightly to 2.8 percent in March from 2.7 percent in February.
Georgia's economy recovered in 2017 and growth this year is expected to remain strong, with the government's reform program supporting investment and productivity.
The central bank said preliminary estimates show growth of 5.2 percent in the first quarter of this year and 5.6 percent in March, with the positive external sector helping boost exports and tourism.
However, NBG cautioned that imports were growing stronger than last year, a fact that was also raised by the International Monetary Fund (IMF) earlier this month.
On April 16 the IMF said Georgia's current account deficit was expected to widen slightly due to higher oil prices and public investment but over the medium term sustained implementation of its economic reform program should support higher and more inclusive growth.
In 2017 Georgia's current account deficit narrowed to 8.7 percent of Gross Domestic Product due to "rapid growth in exports, tourism, remittances," the IMF said.
The IMF also said it expected fiscal prudence to continue and the deficit to decline in the medium term despite scaling-up public investment and the deficit should narrow to 2.8 percent this year from 2.9 percent in 2017.
The IMF also said NBG's monetary policy stance was "adequate and appropriately focuses on price stability," adding that inflation this year is seen in line with target and the flexible exchange rate remains critical to protect the economy against external shocks.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on May 1, 2018 and decided to keep the refinancing rate unchanged at 7.25 percent.
As it was expected, once the temporary factors have mostly petered out, the inflation declined at the beginning of 2018 and it stood at 2.8 percent in March. According to the current forecast, other things equal, the inflation will remain close to its target level (3 percent) throughout the year. Despite the fact that aggregate demand remains below the potential level of output, thus having a downward pressure on inflation, the relatively higher volatility observed on international financial markets increases the risks of stronger transmission of inflationary pressures from the main trading partner countries. As a result, the committee deemed it appropriate to maintain the moderately tight monetary policy. The gradual easing of the policy will be considered once the factors pushing inflation upwards are sufficiently weakened.
The high growth of economic activity continued at the beginning of 2018. Based on preliminary estimates, economy grew by 5.6% annually in March, while in the first quarter the real growth stood at 5.2%. According to current forecasts, as in 2017, relatively high growth of economic activity is expected to carry on in 2018, thus narrowing the negative output gap.
The positive trends in the external sector persisted at the beginning of 2018. The first quarter of 2018 revealed high growth of exports and tourism revenues. The remittances continued to grow as well. However, the growth rate of imports is higher compared to the previous year.
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 June 13, 2018."
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