The FINANCIAL — “If Georgia keeps its exchange rate stable then people will become used to it remaining stable and then when it does change the change may appear greater than it actually is.
The FINANCIAL — “If Georgia keeps its exchange rate stable then people will become used to it remaining stable and then when it does change the change may appear greater than it actually is. It may create bigger instability,” Andrea Bubula, Ph.D in Economics, Expert in applied open-economy macroeconomics and finance, at Columbia University, told The FINANCIAL. “Instead of moving to a new equilibrium with little movement they may jump with a great amount,” Bubula believes.
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“It’s a good idea to have some flexibility in the exchange rate because it could stimulate the economy,” Andrea Bubula, Ph.D in Economics from Columbia University, told The FINANCIAL
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“Interest rates fell from 20% to 12-13%. Mortgage interest rates sharply reduced as well, from 15-16% to 11%. This decision is the result of macro-economic stability and development tools,” said Archil Mestvirishvili, the Vice-Governor of National Bank of Georgia. “Since 2009, we moved to an inflation targeting regime. Our goal is to maintain low inflation and low interest rates. National Bank’s objective is price stability rather than economic stability, because it is necessary for macroeconomic stability. And macroeconomic stability promotes economic growth.”
“As for exchange rates, short-term fluctuations were allowed, which means that the rate will be more stable,” Mestvirishvili said. “There is no need for devaluation. We have reduced the number of interventions on the market, from 17 interventions to 4 in one month.”
“It is planned to reduce the role of National Bank in the foreign exchange market. Loans to small businesses are allowed, which are issued only by mortgage with real estate. The National Bank does not help any sector, and does not subsidize, an important task for National Bank is to reduce dollarization. Reduced dollarization increases macroeconomic stability, reduces the borrower’s costs, and increases the efficiency of monetary policy. It is considered the development of the securities market. EBRD is working for one year to issue securities. At the end of the year or early in 2014 the securities will be issued,” Mestvirishvili added.
“When cutting the policy rate you want to reduce the loan rate for the borrower, if the policy rate goes down the loans rate will remain at the top level and the effectiveness of monetary policy is lost,” said Bubula.
“When all markets are in equilibrium monetary policy can only affect inflation rate. And having stable and low inflation is good. But if some markets are not in equilibrium monetary policy in addition to inflation rate affects economic activity, GDP and the unemployment level. When GDP and inflation are too high the country should definitely stop the economy from heating processes,” said Bubula.
“The Georgian economy for now has a lower growth rate and is below full employment. Lower prices may lead to negative inflation. When people know that prices are going to fall they will hold off from buying anything for the time being. This is very dangerous because it could lead to depression,” Bubula said “People may make consumption and investment decisions looking at the real interest rate. So that should indicate that it’s a good idea to be aggressive and try to stimulate the economy.”
“What’s interesting about Georgia is that despite reduction in policy rates the exchange rate with USD didn’t change. Typically when a country cuts its interest rate the assets become less attractive making the country’s currency weaker. It’s a good idea to discourage liability in foreign currency.”
“We intervened during the year and bought USD 555,000,000 to have a strong exchange rate” said Archil Mestvirishvili.
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