The Monetary Policy Committee of National Bank of Georgia (NBG), on March 29, decided to maintain the refinancing rate (the monetary policy rate) unchanged. The monetary rate is 11.0%.
Inflation remains a global problem despite certain signs of stabilization. In Georgia, the annual inflation rate is still high, but it is on a downward trend. In February, headline inflation fell to 8.1 percent while core inflation fell to 6.6 percent. The main reason for the decline in inflation is external factors. Recently, the international oil price has been declining, while international shipping costs are also approaching pre-pandemic levels. According to the Food and Agriculture Organization of the United Nations, the international food index continues to decline.
The stronger Lari (Gel), coupled with the local market’s increasing demand, is gradually reducing imported inflation. Despite the overall decrease, both core inflation and domestic inflation remain high. The tightening of monetary policy has led to a reduction in headline inflation. Credit growth in Georgia has also slowed as a result the macroprudential instruments that were activated recently, and the tightening global financial conditions. This in turn contributes to stabilizing aggregate demand, and therefore the downward trend of inflation. It is important, therefore, that inflationary expectations continue to decline. Due to the base effect, and the tightened monetary policies, the current forecast shows that headline inflation will continue to decline at a significant pace, and that it is likely to fall below the target level by the second half of this year. This will ensure that long-term expectations for inflation remain anchored.
Despite the positive factors mentioned above, the geopolitical situation is still quite severe, which leads to a high level of uncertainty. The inflation risks are influenced by the possible pressures on the labor market. In recent years, productivity growth lagged behind wage growth. GeoStat reports that in the fourth quarter 2022 wages increased by 21,2% annually while productivity only increased by 6.8%. This trend is reflected by the price of domestic goods and service, which has a growth rate of 13.8%.
In light of the high level of uncertainty and risk, the NBG continues to focus on reducing inflation while maintaining a tight monetary policies. If the current trends continue, it will only be possible to gradually exit the tight monetary policies once the trend of domestic inflation has been evident.
The NBG will continue to monitor the economy and financial market developments and will use every tool available to ensure price stability.
The next meeting of Monetary Policy Committee is scheduled for May 10, 2023.
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