The National Bank of Georgia (NBG) has begun relaxing monetary policy and cut the refinancing rate by 0.50 percentage points to 8.5 per cent, announces the NBG.
The NBG explains that amid the Covid-19 pandemic and the sharp decline in international oil prices, economic uncertainty in the world remains high. In Georgia, the annual inflation rate in March was 6.1 per cent. The NBG predicts that due to temporary factors, inflation will remain high for several months, then gradually decline, and in the first half of 2021 approach the target level.
A sharp decline in external and domestic demand due to pandemic will create a downward pressure on inflation over the course of the year. Given the expected reduction in the demand, there is no need to further maintain such a tightened policy stance”, said the NBG.
Despite the rate cut, monetary policy remains tight, ensuring a return of inflation to the target level in the medium term. The Monetary Policy Committee will exit the tight monetary policy stance gradually and further steps will depend on how quickly inflation expectations recede.
Following the decline in domestic and external demand, Georgia's real economic growth will be around -4 per cent, says the NBG.
Preliminary data shows that in March exports of goods fell by 22 per cent and revenues from international travellers declined by almost 70 per cent.
There was also a decrease in remittances (-9%). At the same time, imports declined 13 per cent, indicating a weakening in domestic demand.
The NBG said that delays in production and supply chains affect companies' costs and, consequently, prices.
However, assuming that the strict restrictions imposed by the spread of the COVID-19 are only temporary, the latter will only have a temporary effect, hence the monetary policy reaction to this type of shock will be counterproductive. At the same time, the sharp decline of oil prices on international markets are reflected in a gradual decline in gasoline prices in Georgia, exerting a downwards pressure in inflation”, said the NBG.
The NBG said that expected substantial donor support will help mitigate the impact of the shock on economic activity and inflation.
Considering the current level of uncertainty, both credit and liquidity risks have increased, which has been reflected in the growth of market interest rates.
To ensure that liquidity risk does not limit credit to the economy, the NBG introduced additional instruments to provide liquidity, through swap operations for both commercial banks and microfinance organisations.