Georgia cuts rate 3rd time in '20, sees 5% GDP contraction

     Georgia's central bank lowered its key interest rate for the third time this year as it continues what it described as a "gradual exit from the tightened policy stance at a slower pace," adding inflation is expected to continue to decline during the rest of this year due to weak demand as the economy shrinks.

     The National Bank of Georgia (NBG) cut its refinancing rate by another 25 basis points to 8.0 percent and has now cut it by 100 points this year following cuts in April and June.

      Between September and December last year NBG raised its rate four times and by 250 basis points to curb inflationary pressures from a fall in the lari's exchange rate.

     "The NBG will continue to monitor the developments in the economy and financial markets and will use all instruments at its disposal in order to ensure the price stability," the central bank said.

     Inflation in Georgia declined for the third consecutive month to 5.7 percent in July and NBG said the latest forecast shows inflation will continue to decline the rest of this year and fall below the 3.0 percent target in the first half of 2021 before it then rises and approaches the target from below.

      The fall in inflation will be driven by weak aggregate demand and the central bank forecast a 5.0 percent contraction in the economy this year.

     "The revision of economic growth forecast followed a larger-than-expected decline in global economic activity and external demand than was evident in the early stages of the pandemic," the central bank said.

     Georgia's gross domestic product grew by an annual 2.2 percent in the first quarter of this year, down from 5.1 percent in the previous quarter.

      Preliminary data showed a 7.7 percent annual fall in economic activity in June while revenue from international travelers was down 97 percent in the same month, exports fell an annual 14 percent and imports fell 22 percent.

     However, compared with the months of April and May, there are signs of a recovery in domestic demand due to fiscal stimulus and better-than-expected credit activity and remittances, NBG added.

     Following the rate hikes last year, Georgia's lari strengthened before it tumbled in March this year, along with most other currencies. 

      The sharp fall forced NBG to intervene six times in the foreign exchange market and in early April the central bank accounted a series of emergency measures in response to the COVID-19 pandemic, including the provision of $400 million through swaps to commercial banks and microfinance institutions, an easing of banks' capital requirements and allowing them to use foreign currency buffers to manage lari liquidity.

     Since mid-June the lari has been more stable and was trading at 3.07 to the U.S. dollar today, up 14 percent since a low of 3.50 on March 27 but still down 6.8 percent since the start of this year.

     The National Bank of Georgia (NBG) issued the following statement:

"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on August 5, 2020, and decided to cut the refinancing rate by 0.25 percentage points to 8.0 percent.

As expected, inflation continued to decline in July, reaching 5.7 percent, while prices fell by 0.5 percent on a monthly basis. According to the NBG forecasts, other things equal, inflation will continue to decline over the rest of the year, fall below the target level in the first half of 2021 and then approach it from below. The decline in inflation will be driven by the weak aggregate demand. In particular, according to the revised forecast of the NBG, the economy is expected to shrink by 5 percent in 2020, excerting the downward preassure on inflation forecast. The revision of economic growth forecast followed a larger expected decline in global economic activity and external demand than was evident in the early stages of the pandemic. At the same time, the risks of inflation expectations should also be taken into account as inflation rate remains above the target over a protracted period. Hence, the Monetary Policy Committee continues gradual exit from the tightened policy stance at a slower pace, reducing the rate by 0.25 percentage points.

Preliminary indicators point to a decline in aggregate demand. According to preliminary data, economic activity fell by 7.7 percent year-on-year in June. However, compared to April-May, there are signs of recovery in domestic demand, which is associated with fiscal stimulus and better-than-expected dynamics of credit activity and remittances. According to preliminary data, revenues from international travelers in June fell by 97 percent year-on-year. Meanwhile, the demand for exports also remained weak, with an annual decline of 14 percent in June. With the reduction of export proceeds, imports also fell by 22 percent year-on-year.

The NBG will continue to monitor the developments in the economy and financial markets and will use all instruments at its disposal in order to ensure the price stability.

The next meeting of the Monetary Policy Committee is scheduled on September 16, 2020."

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