Central Bank Increases Key Rate to 7%

The FINANCIAL — The National Bank of Georgia increased its key rate by 25 basis points to 7% “to control the inflation expectations.”

NBG said in a statement on May 2, that “the decision is based on macroeconomic forecasts,” according to which, it expects that this year’s inflation rate “will be above its target, due to the supply side pressures.” NBG however, added that the inflation rate would remain “close to the 3% target” in 2018, as a result of “the expiration of one-off effects.”

“All other things being equal, a further increase in the policy rate is not expected. Along with the expiration of one-off factors affecting inflation, it is expected that the key rate will gradually return to its neutral level in the medium term,” the National Bank said.

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“Factors affecting the demand side of the consumer prices are still weak, although economic activity has improved. According to preliminary estimates, economic growth in the first quarter [of 2017] is 5%. Following the economic recovery of [Georgia’s] main trading partners, external demand has surged, significantly increasing the revenues from tourism and exports. Moreover, compared to the previous year, the volume of remittances has grown,” the statement reads.

“The National Bank of Georgia will monitor the developments in the economy and financial markets and will use all available instruments at its disposal to ensure the price stability,” the statement reads.

NBG started tightening its monetary policy from February 2015 pushing the key refinancing rate from 4% in February up to 8% by the end of the year. The rate remained unchanged at 8% in the first three months of 2016 but went through gradual easing beginning from April and remained unchanged at 6.5% until January, 2017. The National Bank of Georgia increased the key rate to 6.75% on January 25 and announced further “gradual” tightening of the monetary policy in the course of the next two quarters.

The next meeting of NBG’s monetary policy committee has been scheduled for June 14, 2017.