Georgia hikes rate 4th time, lari strengthens further

December 11, 2019

By CentralBankNews.info
Georgia’s central bank raised its benchmark refinancing rate by another 50 basis points to 9.0 percent, living up to its pledge from October to continue tightening its monetary policy stance until the pressure from a low exchange rate has receded, helping boost the lari’s exchange rate further.
The National Bank of Georgia (NBG) has now raised its rate by 250 basis points since September after two hikes that month and another hike in October and today.
These rate increases came after two rate cuts in January and March of a total of 50 points so the net increase in the central bank’s benchmark rate this year is 200 points.
Georgia’s inflation rate inched higher to a new 2019-high of 7.0 percent in November from 6.9 percent in October but NBG said it expects inflation to start declining from March next year and approach its target of 3.0 percent by the end of 2020.
“Along with one-off factors, the inflation overshooting was caused by the nominal exchange rate depreciation,” the central bank said, adding it had started to tighten policy in September to neutralize inflationary pressure from the depreciation.
“During the appreciation observed during the last few days, the GEL nominal effective exchange rate remains undervalued, pinning inflation exceptions above the target level,” NBG said, adding future policy decisions will depend on the speed of neutralization of inflationary pressures stemming from the exchange rate depreciation.
The central bank’s rate hikes have helped turn around the lari’s trend after it fell steadily through September. It then stabilized and has been rising since hitting a 2019 low of 2.98 to the U.S. dollar on Nov. 20.
Today the lari rose further and was trading at 2.87 to the dollar, up 3.8 percent since Nov. 20 but still down 6.6 percent since the start of the year.

The National Bank of Georgia issued the following statement:

“The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on December 11, 2019, and decided to raise the refinancing rate by 0.5 percentage points to 9.0 percent.

In November, the annual inflation rate stood at 7.0 percent. Along with one-off factors, the inflation overshooting was caused by the nominal exchange rate depreciation. From September, the NBG started to tighten monetary policy aiming at neutralizing inflationary pressures stemming from the exchange rate depreciation. Despite the appreciation observed during the last few days, the GEL nominal effective exchange rate remains undervalued, pinning inflation expectations above the target level. As it was stated in previous decisions of the Committee, in order to maintain inflation close to the target level in the medium term, the policy tightening would continue until the pressure from exchange rate is receded. Therefore, the MPC increased the refinancing rate by 0.5 percentage points.
According to the forecast, other things equal the inflation will start declining from March 2020 and approach the target by the end of the year. The future decisions of the Committee will depend upon the speed of neutralization of inflationary pressure stemming from the exchange rate depreciation.
Moderate growth rate of export and money transfers is retained. After the decline in the previous months, tourism revenues increased in October and November in annual terms. Moreover, the FDI inflows grew as well in the third quarter. Against described external developments and robust credit growth,  the preliminary estimates indicate high economic activity.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal to ensure price stability.
The next meeting of the Monetary Policy Committee is scheduled on January 29, 2020. “

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