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National Bank Cheapens Loans: Stable Currency Exchange Rate and Low Inflation Rate will Stimulate Economic Growth

The monetary policy committee of the National Bank of Georgia (NBG) has taken a decision on reducing the refinancing rate by 25 base point to 6.5%.  This decision is based on macroeconomic forecasts under which the tightened monetary policy should be gradually alleviated to move closer to the target inflation indicator.

“According to the forecasts, in other equal conditions it is expected to lower the monetary policy rate to 6% in midterm period.

In August annual inflation rate of the consumer prices declined to 0.9% and this corresponds to the existing forecasts. Disappearance of base effect has important influence on reduction in inflation indicator. The weak joint demand stimulates also inflation slowdown tendency. According to the current forecasts, the inflation rate will be maintained at low level in the next quarters and will get closer to the target indicator at the end of 2017.  Gradual alleviation of strict monetary policy and fiscal stimulus foster moving to the target inflation rate and improving the joint demand. The further change in monetary policy rate depends  on economic developments, expected affect of risks coming from external sector and the volume of influence of external shocks coming from trade partner countries on the Georgian economy”, the NBG representatives said.

The target inflation rate of 2016 is 5%, while the rate is expected to decline to 3%. However, taking into account the past months of 2016, the annual inflation rate is considerably lower compared to the target rate. Consequently, the NBG is able to gradually alleviate the monetary policy. For example, starting February 2016  the annual inflation rate shows (5.6%) slowdown tendency and the rate fell to 1.1% in June. In July the annual inflation rose to 1.5% and declined to 0.9% in August.

On the one hand, monetary policy alleviation signifies an outflow of more money resources to the economy. Commercial banks take cheaper loans  from the NBG. Consequently, commercial banks also issue credits at lower interest rates. On the other hand, bank clients’ credits are affixed to the refinancing loan interest rate and this change makes direct influence on their expenditures.

As of July 1, 2016, a total of 17 392 loans affixed to floating interest rate have been issued. An absolute majority of them is affixed to the refinancing rate. Consequently, borrowers will pay lower interest rates, because the NBG has reduced the monetary policy rate by 25 base point to 6.5%. The value of all loans with floating interest rate makes up 786 million GEL.

It should be noted that for several months experts urged the NBG to smooth the monetary policy rate.. Based on difference between the target inflation rate and actual indicators, the refinancing rate could be reduced more. However, this year the monetary policy rate may be reduced to 6% if common level of prices does not rise. It should be also noted that at the beginning of 2016 the interest rate on refinancing loan had increased to 8% because of high inflation rate and instable national currency exchange rate.

As to the national currency exchange rate, in the last period GEL is demonstrating unusual stability and this is an achievement of the NBG efforts, most of all. In the past month the GEL exchange rate slightly strengthened against USD and stabilized around 2.30 GEL.

To prevent extreme change in the national currency exchange rate, the NBG extracted 20 million USD from turnover on August 22, but on August 25 sold 20 million USD again.  The time will show whether  the GEL exchange rate is artificially stabilized in the pre-election period, according to some economic experts. The fact is that the low inflation and stable exchange rate  make positive influence on economic growth.

By Merab Janiashvili
Economic Analyst
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