By CentralBankNews.info
Georgia’s central bank left its benchmark refinancing rate steady for the first time since after four consecutive rate hikes after the exchange rate of the lari strengthened but said it would maintain a tight monetary policy stance inflation expectations decline to its 3.0 percent target.
The National Bank of Georgia (NBG) raised its rate four times from September to December last year by a total of 250 basis points to curb inflation from the fall in the lari, which depreciated 10 percent from the start of 2019 until late November.
But in early December the lari began to strengthen, taking some of the pressure off inflation, but NBG said the “nominal effective exchange rate remains undervalued.”
After rising 4 percent between Dec. 8 and Dec. 14, the lari eased again and was trading around 2.90 to the U.S. dollar today, down 1.4 percent since the start of this year.
“In recent periods, economic growth accelerated and lending is robust,” NBG said, adding “if these dynamics create additional inflationary pressure, the tight monetary policy stance may be maintained for more extended period.”
Georgia’s inflation rate was steady at 7.0 percent in December and November but is still the highest rate since June 2016.
The central bank expects inflation to decline at the start of 2020 but first begin to approach its 3.0 percent inflation target by the end of the year, a decline it said “will be ensured by the monetary policy which will remain tight until the medium term inflation expectations decline to the three percent target.”
In December the International Monetary Fund (IMF) approved another $41.4 million loan to Georgia, its sixth under a 3-year program of just under $300 million, saying this should help authorities maintain policy discipline and help advance structural reforms.
The IMF said the recent rise in inflation reflected both temporary factors and the impact of the lari’s depreciations, and said the NBG’s tightening was appropriate as it addressed inflationary pressures.
But IMF also said exchange rate flexibility remains “vital as a shock absorber” for Georgia’s economy and interventions should be limited to addressing excessive volatility or building reserves.
The IMF forecasts average inflation this year of 4.5 percent, down from 4.9 percent in 2019, and economic growth of 4.3 percent in 2020, down from 4.6 percent in 2019.
The National Bank of Georgia issued the following statement: