In May the National Bank of Georgia (NBG) raised its rate for the second time this year - for total hikes of 50 basis points - but said then and in June that further rate increases were not expected as inflation was expected to decline to its target level in 2018 as temporary factors die out.
Georgia's inflation rate rose to a 2017-high of 7.1 percent in June from 6.6 percent in May, in line with the central bank's forecast, with the increase in tobacco products and fuel contributing to 2.6 percentage points of the inflation rate.
Inflation is expected to decline in second half of this year but still remain above the NBG's target before meeting the target next year.
This year NBG targets inflation of 4.0 percent, down from its 2016 target of 5.0 percent. For 2018 the NBG will lower the target further to 3.0 percent, the rate it considers the long-run rate.
Georgia's economy performed better than expected in the first half of this year, helped by exports, tourism and remittances from abroad. However, domestic demand and overall economic activity are still below potential and is therefore not creating any demand side pressure on inflation, NBG said.
Georgia's economy grew by an annual rate of 5.1 percent in the first quarter of this year, up from 2.8 percent in the previous quarter and 3.3 percent in the year ago quarter.
The exchange rate of Georgia's lari has been firming steadily since mid-December 2016 and was trading around 2.4 to the U.S. dollar, up almost 11 percent 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 26th of July, 2017 and decided to keep the refinancing rate unchanged at 7 percent.
In the second quarter of 2017, the hike of inflation is in line with existing forecasts, according to which due to one-time, supply side factors, the inflation is expected to remain above the target rate for the remainder of the year. In June, the annual inflation rate has increased, reaching 7.1%. The price increase on Tobacco products and fuel has contributed by 2.6 percentage points. The increase in the inflation rate is temporary, it is expected inflation to start declining from the second half of the 2017 and with the after the impact of one-off factors will die out in the beginning of 2018 the inflation will converge to its target level. Thus, there is no need for further tightening of monetary policy. Given the absence of additional shocks in the medium term, the policy rate is expected to decrease to its neutral level.
In the first half of 2017, economic growth indicators reveal higher than expected growth, which can be attributed to the improvement of the external sector. In particular growth of exports of goods and services (tourism) should be noted, as well as the increase in remittances. Along with the rise of external inflows, consumption has increased, contributing to economic growth.Yet, domestic demand and overall economic activity are still below its potential level; thus, it does not create demand side pressure on inflation.
In the second quarter of 2017, the annual growth rate of the bank lending is around 15%. The growth of credit portfolio can be attributed to loans issued in the national currency, allowing price stability to be achieved with only moderate changes in the policy rate.
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 maintain financial and price stability.
The next meeting of the Monetary Policy Committee will be held on 6th of September, 2017"
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