NBG Reduces Its Policy Rate By 25 Basis Points To 6.75%

The FINANCIAL — The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on July 27, 2016 and decided to reduce the refinancing rate by 25 basis points to 6.75 percent.

The monetary policy decision is based on the macroeconomic forecast, according to which the phasing out of tight monetary policy must continue in order for inflation to reach its target value. According to the forecast unless other factors affecting the economy are realized, the monetary policy rate may be expected to decrease to 6% in the medium term, according to National Bank Of Georgia.

The annual CPI inflation in June dropped more than it was expected, to 1.1%. This decrease was largely due to the decrease in inflation expectations and larger-than-expected transmission of the decline in the world prices of oil and foodstuff. Expiration of base effect and weak aggregate demand were other factors causing inflation to drop. According to the current forecast the inflation will remain low in the coming quarters reaching the target by the end of 2017.

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External demand is still weak; in the first half of the year the annual decrease of export was 12%. The economic growth forecast has increased as a result of higher activity in both domestic and foreign investment, however due to external factors, the growth is still expected to remain below potential.

The forecast risks have increased given the significant uncertainty in the region. The National Bank also pays attention to the impact of monetary policy on financial markets. Based on all the aforementioned factors the further rate of monetary policy softening will depend on the processes taking place in the economy, possible realization of external sector risks and the magnitude of shock transmission from trade partner countries to Georgian economy.

The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal in order to ensure the price stability.

The next meeting of the Monetary Policy Committee will be held on September 7, 2016.