Page 16 - GEORptJul19

4.2 Inflation
4.2.1 CPI dynamics
Georgia’s inflation hits 4.7% y/y in Georgia with weakening currency not a help
Georgia’s consumer price index (CPI) inflation rate accelerated to 4.7% y/y in May from 4.1% y/y in April and 3.7% y/y in March, statistics office INS has announced. This is a significant deviation from the 3% target anticipated by the central bank.
The prices of food (+2.4pp) and alcoholic beverages and tobacco (+1.4pp) contributed mostly to the annual inflation reading.
Inflation will remain above the 3% target throughout the year and ease no sooner than 2020, central bankers said at their May monetary board meeting. The national lender consequently envisages moderate 50bp rate cuts over the next two years, taking the benchmark rate to 6.0% by Q1, 2021. The rate-setters held the benchmark interest rate at 6.50% on May 1, citing forecasts that suggested annual inflation would stay “close to its 3% target” this year.
The local currency’s weakening, albeit moderate (1.5% versus the euro in May compared to April), is likely to add more inflationary pressures while, on the upside, support the narrowing of Georgia’s wide trade deficit.
According to the central bank’s forecast, downward pressure on inflation coming from still weak aggregate demand will be balanced out this year by the effect of excises taxes on tobacco and by imported inflation along with higher intermediate costs of servicing debt due to dollarisation. In the medium term, alongside the elimination of one-off factors, aggregate demand is expected to increase to the potential level of output, ensuring the inflation rate is maintained not too far from the target.
16 GEORGIA Country Report July 2019 www.intellinews.com