Georgia holds rate due to rising uncertainty and risks

     Georgia's central bank left its benchmark interest rate steady for the second month in a row, citing uncertainties associated with an acceleration of the spread of COVID-19 and a rise in geopolitical risks, but added the pace and gradual exit from the tight monetary policy stance still depends on inflationary expectations and economic activity.
     The National Bank of Georgia (NBG) left its refinancing rate at 8.0 percent, unchanged since August when it cut it for the third time this year following earlier cuts in April and June for a total easing of 100 basis points.

     But between September and December 2019, NBG raised the rate four times and by a total fo 250 basis points to curb inflationary pressures from a decline in the lari's exchange rate.

     "Preliminary indicators still point to weak aggregate demand," the central bank said, adding economic activity in August was estimated to have contracted by an annual 5.3 percent, with an improvement due to a recovery in domestic demand, supported by fiscal stimulus, credit activity and remittances.

     In August the central bank forecast a 5.0 percent economic contraction this year, an estimated shared by the International Monetary Fund in September when it also said it was essential for the central bank to maintain exchange rate flexibility to manage the economic shock.

     But against the backdrop of a more widespread spread of the virus, the global economic recovery in 2021 is expected to be slower than previously expected and this will impact external demand. Domestic demand will be the main driver of growth next year.

     Georgia's gross domestic product contracted by 12.3 percent year-on-year in the second quarter and preliminary data show that revenue from international travelers had plunged by an annual 95 percent in September while the export of goods had risen for the first time since January to grow 8.6 percent.

     Georgia's inflation rate has been decelerating for the last five months and fell to 3.8 percent in September and NBG said it expects this declining trend to continue with inflation remaining close to its 3.0 percent target in 2021.

     Like most currencies, Georgia's lari tumbled in March, forcing NBG to intervene six times in the foreign exchange market. But after rebounding in April and May, the depreciation of the lari has continued and today it was trading at 3.22 to the U.S. dollar, up 8 percent from a record low of 3.48 at the end of March but still down 11 percent since the start of this year.

     The National Bank of Georgia issued the following statement:

"The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on October 28, 2020, and decided to keep the refinancing rate unchanged at 8.0 percent.

Inflation dynamics in recent months are in line with the forecasts of the NBG. Annual inflation continues to decline, reaching 3.8 percent in September. According to the current forecast, other things equal, annual inflation will have a declining trend and remain close to the target level in 2021. The declining dynamics of inflation is driven by weak aggregate demand and it is expected that this impact will persist. The decrease in external demand is especially noteworthy. Against the backdrop of coronavirus activation and anticipated further extension of pandemic, global economic recovery in 2021 is expected to be slower than previously forecasted, which will have downward impact on external demand. The Monetary Policy Committee also took into account the uncertainty associated with the acceleration of the virus spread and the increase in geopolitical risks. According to the current estimates, the gradual exit from the tight monetary policy stance (normalization) and its pace will depend on inflation expectations and the dynamics of economic activity.

Preliminary indicators still point to a weak aggregate demand. According to current estimates, economic activity fell by 5.3 percent in August, year-on-year. Improvement of this indicator is driven by relatively recovered domestic demand, compared to previous months. This is related to the fiscal stimulus and the better-than-expected dynamics of credit activity and remittances. According to the existing forecasts, other things equal, domestic demand will be the main driver of economic growth in 2021. In contrast, external demand remains significantly reduced. Revenues from international travelers are minimal and, according to preliminary data, in September it declined by 95 percent anually. At the same time, demand for exports of goods continued to improve and, for the first time since January, the annual growth was positive at 8.6 percent in September. The high growth of remittances also persisted. Amid improved domestic demand, imports of goods fell by 9 percent year-on-year in September, which is lower decline than in previous months.

The NBG continues to monitor the developments in the economy and financial markets and will use all available tools to ensure price stability.

The next meeting of the Monetary Policy Committee will be held on December 9, 2020."

     www.CentralBankNews.info