The National Bank of Georgia (NBG) raised its rate by another 50 basis points to 7.50 percent and has now raised it by 100 points this month.
The two rate hikes partly reverse the two 25-basis-point rate cuts in January and March so the rate has been raised by a net 50 points this year. The last time NBG's key rate was at this level was in April and May 2016.
"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 the price stability," the central bank said, noting it had started to tighten monetary policy at its previous meeting to neutralize inflationary pressures from the depreciation of the lari and policy tightening was expected to continue until the pressure on the exchange rate was eliminated.
NBG added it had also referred to the possibility of an extraordinary session of its monetary policy committee if necessary.
"Since the last committee meeting, the nominal effective exchange rate of the GEL has remained undervalued and inflationary expectations persist," NBG said.
The lari has been falling since mid-February and was trading at 2.97 to the U.S. dollar today, down 9.8 percent since the start of this year, while inflation rose for the third consecutive month to 4.9 percent in August from 4.6 percent in July, boosted by higher taxes on cigarettes and higher import prices from the lower lari.
The central bank targets inflation of 3.0 percent.
Economic data reveal positive dynamics, the central bank said, adding the balance of trade in goods and services continued to improve in August, which in addition to the tighter monetary policy stance, should help strengthen the lari through the expectations channel and thus help lower the inflation rate.
Georgia's gross domestic product grew an annual 4.5 percent in the second quarter of this year, down from 4.9 percent in the first quarter and the trade deficit narrowed to US$435.1 million in August from $440.3 in July and $497.4 million in August 2018.
The National Bank of Georgia issued the following statement:
"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) held an extraordinary meeting on September 25, 2019 and decided to raise the refinancing rate by 0.5 percentage points to 7.5 percent.
At the previous meeting of the Monetary Policy Committee, the National Bank of Georgia started tightening monetary policy aiming at neutralizing inflationary pressures stemming from the exchange rate depreciation. As stated in the committee's decision from September 4, policy tightening was expected to continue until the pressure on the exchange rate was eliminated. Moreover, in the same decision the Committee also referred to the possibility of holding an extraordinary session if necessary.
Since the last committee meeting, the nominal effective exchange rate of the GEL has remained undervalued and inflationary expectations persist. Hence, at today's extraordinary meeting, the Monetary Policy Committee decided to increase the refinancing rate by 0.5 percentage points. 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 the price stability.
The data from the external sector reveal the positive dynamics. Specifically, the balance of trade in goods and services continued to improve in August, which, in addition to the tighter monetary policy stance, promotes the strengthening of the exchange rate through expectations channel and, as a result, should provide the desired dynamics of inflation over the medium term.
The next meeting of the Monetary Policy Committee is scheduled on October 23, 2019."
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