Page 36 - GEORptMar20

8.2 ​Central Bank policy rate
Georgian expects hawkish monetary policy to pay dividends by year-end
Georgia’s central bank at its January 29 board meeting maintained its refinancing rate at 9% and said that monetary policy would remain tight until medium-term inflation expectations declined to the 3% target. ​The hawkish monetary policy might be kept in place for some time, the central bank implied in a press release issued along with the rates decision.
The National Bank of Georgia (NBG) argued that although the nominal effective exchange rate strengthened slightly in December, reducing pressure on inflation, the Georgian lari remained undervalued and if economic growth and lending, both of which have remained robust recently, created additional inflationary pressure then “the tight monetary policy stance may be maintained for a more extended period”.
Besides one-off supply side factors in early 2019, the nominal effective exchange rate depreciation had a significant impact on inflation and the NBG explained the tight monetary policy stance as a response to the depreciation and its impact on price stability.
Georgia’s consumer price index (CPI) inflation rate stayed at 7% y/y in December. It is expected to fall in January when the effects of a hike in excise duties one year ago will fade.
According to the NBG forecast, other things being equal, the inflation rate will start to decline from the beginning of the year and approach the 3% target by the end of the year. "This will be ensured by the monetary policy which will remain tight until the medium term inflation expectations decline to the three percent target," the monetary authority stated.
Georgian inflation gradually accelerated from the 1.5% y/y posted in December 2018, driven by higher excise duties on tobacco and rising food prices on the one hand and local currency weakening magnified by expectations for further exchange rate slippage on the other.
The hawkish monetary policy pursued since last autumn with the aim of addressing the effects of the negative sentiment versus the local currency has so far not surfaced in the GDP growth figures—but lagged effects are still to come. Nonetheless, growth remains robust in absolute terms and no major slowdown is expected unless external factors deteriorate abruptly.
The latest forecast from a major international financial institution is from the World Bank. In its Global Economic Prospects report, it said Georgia’s growth this year is expected at 4.3%. Six months ago it was anticipating 4.8%.
36​ GEORGIA Country Report​ March 2020 ​​www.intellinews.com