Central Bank increases refinancing rate to 7% to deal with inflation

The National Bank of Georgia (NBG) has decided to increase its refinancing rate in response to expectations of increased inflation.

The Monetary Policy Committee (MPC) of the Bank met today and decided to increase the refinancing rate by 25 basis points to seven percent.

The NBG said the monetary policy decision was based on the macroeconomic forecast, according to which, due to the supply side pressures, inflation is expected to be above its target rate during 2017.

Nevertheless, once the effect of one-time factors affecting [annual] inflation is exhausted, the inflation rate is expected to decline at its target level in 2018. Moreover, by increasing the policy rate, the National Bank of Georgia intends to control inflation expectations,” said the Bank.

Georgia’s monthly inflation amounted to -0.5 percent in March, while annual inflation (Consumer Price Index change) increased 5.4 percent.

Other things equal this year, a further increase in the policy rate is not expected. With the elimination of the impact of the aforementioned one-time factors, the inflation will start declining and will stay close to the target in the medium term; the policy rate in the medium term is expected to gradually decrease to its neutral level,” the Bank added.

The NBG explained this year that the factors affecting the demand side of the consumer prices are still weak, although economic activity has improved.

Economic growth in the first quarter is five percent. Following the economic recovery of the main trading partners, the external demand has surged, significantly increasing the revenues from tourism and exports. Moreover, compared to the previous year, the volume of remittances has grown,” the Bank said.

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

The next meeting of the Monetary Policy Committee will be held on May 4, 2017.