Page 18 - GEORptMay21

Georgia inflation trends and outlook
“The setback in inflation or the “deflationary shock” in 2020 in all our countries in CEE had not been as strong as in Western Europe (with a few exceptions like Bosnia or Croatia),” says Gunter Deuber, chief economist of RBI. “Therefore, the reflation we are seeing across the region and in Western markets is taking place from a much higher starting point in some places.”
How serious the inflation challenge will turn out to be will depend on many variables, including on how fast pandemic restrictions are lifted, how much pent-up demand consumers really have, and how quickly governments withdraw their support packages. In some countries, notably the Czech Republic, the labour market has remained tight despite the pandemic, and wages could start to rise fast again soon.
If inflation – and inflationary expectations - become a problem again, the question then will be how fast the region’s central banks will move to raise rates, given that their economies are still fragile after the pandemic.
“The peak in HICP inflation will likely be reached in April-May 2021 and could become a headache for central bankers, especially when coupled with strong double-digit growth of retail sales and industrial production,” said a recent research report by Erste Bank.
Some central banks in countries with high inflation and weak currencies – such as Turkey, Ukraine and Russia – may have little choice but to hike rates. Other likely candidates are seen as economies with tight labour markets such as Czechia.
PAST TRENDS: The high dollarization of the Georgian economy fortifies the transmission of exchange rate fluctuations to inflation. Concerns over the widening current account gap put pressure on the exchange rate and fuelled inflationary expectations in the second half of 2018, forcing the central bank (NBG) to maintain an active policy particularly with regard to the FX market. In 2019, the NBG could not afford to ease monetary policy, as inflation accelerated from 1.5% at the end of 2018 to 7% one year later. Faced with the sudden stop of inflows that spurred expectations for a major exchange rate correction, Georgian authorities had to act quickly after the onset of the coronavirus pandemic in the spring of 2020. The NBG tightened monetary policy. It has used frequent interventions as needed to supply foreign currency.
18 GEORGIA Country Report May 2021 www.intellinews.com