Central bank says inflation to remain below target level in second half of 2023

The National Bank of Georgia on Wednesday said even though inflation was “still high” in the country, the trends were following a “downward trajectory”, with the numbers expected to remain below the “target level” in the second half of the year.

Statistics showed headline inflation decreased to 8.1 percent last month, while core inflation dropped to 6.6 percent. NBG said the reduction was mainly due to external factors. 

In particular, international oil prices have been decreasing recently, whereas international shipping costs have also approached the pre-pandemic level. In addition [...] the international food price index continues to decrease. Given the stronger lari exchange rate, these trends are being gradually transmitted to the local market, reducing the imported inflation”, the Bank said.

Headline inflation will continue declining at a “significant rate” with current forecast, “due also to the base effect and tightened monetary policy stance”, it added while also noting the figures also created expectations that “long-term inflation expectations [will] remain anchored to the target”.

The Bank also said “a number of risks” still remained on the market.

“Despite the aforementioned positive factors, uncertainty remains quite high due to the severe geopolitical situation. Possible pressures from the labour market are worth noting among the upward risks affecting inflation”, it noted. 

“In particular, productivity growth has been lagging behind wage growth in recent periods [...] In the fourth quarter of 2022, wages increased by 21.2 percent annually, while productivity was up by only 6.8 percent. This trend is reflected in the prices of domestic goods and services, the growth rate of which is still high and amounts to 13.8 percent”, the Bank said.

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Considering the high uncertainty and risks, the NBG said it remained focused on reducing inflation and maintaining a tight monetary policy.

“If the current trends are maintained, it will be possible to begin a gradual exit from the tight monetary policy stance only after the trend of reduction in domestic inflation is evident”, the NBG said in its statement following the decision of its Monetary Policy Committee to keep the refinancing rate unchanged at 11 percent.