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Inflation Grows – How Timely National Bank Has Tightened Monetary Policy

General price level has risen again. In November 2017 the inflation level rose by 1.1% compared to the previous month, while annual inflation constituted 6.9%.

It is worth noting that this year National Bank had planned the inflation at 4%, however, the growth in general price level  exceeded the target indicator and since them the figure remains above 4%.

Change in prices in the following groups have made key influence on shaping inflation indicator in November: prices in the group rose by 2.8% and the group’s ratio in total inflation upturn constituted 0.39%. Prices rose for purchase of vehicles (9.5%), transportation services (4.5%) and exploitation of personal vehicles (1.6%);

Food and soft drinks: prices in the group rose by 0.8% and the ratio in total inflation indicator constituted 0.26%. Prices rose in subgroups: vegetables and garden plants (6.5%), sugar, jam and other sweets (1.4%), milk, cheese and eggs (1.2%) and oil and fat (0.7%); At the same time, prices declined on fruit and grapes (-9.2%); Strong drinks, tobacco: prices rose by 1.7% and the ratio in total inflation index upturn made up 0.12%. Prices increased on tobacco products (1.9%) and strong drinks (1.4%).

Change in prices in the following groups has made influence on annual inflation: food and soft drinks: prices rose by 7.5% with a 2.24% contribution to the whole index upturn; Prices rose in subgroups: vegetables and garden plants (25.8%), meat and meat products (9.9%), milk, cheese and eggs (9.7%), coffee, tea and cacao (6.1%). Transport: prices have risen by 15.8% with a 2.02% contribution to the annual inflation growth. Prices have risen on exploitation of personal vehicles (18.9%), purchase of vehicles (18.6%) and transport services (8.5%);

Strong drinks, tobacco: prices rose by 19.4% with a 1.24% contribution to the total index growth. In the group prices rose on tobacco products (40.4%); healthcare: prices rose by 6.4% with a 0.55% contribution to the total index upturn. Prices rose in the subgroup of medical products, devices and equipment (12.2%) and outpatient medical services (6.3%).

For several months, the general price level growth is fixed above 4%, however, National Bank of Georgia (NBG) has stubbornly repeated that it was not necessary to tighten monetary policy. Last week the NBG president said an absolutely surprising thing that money mass cannot influence GEL exchange rate and inflation level.

Money mass makes influence on neither inflation nor exchange rate, NBG President Koba Gvenetadze noted at the finance and budget committee meeting.

According to the NBG President, «When economy is developed, when various instruments are introduced, money mass cannot give right information».

«Correlation between inflation and money mass is violated. Therefore, the countries, having seen this interaction is absent or has shrunk, have decided that this method will not work any more and moved to the inflation targeting. If we talk about 50% inflation and 100% money mass growth, naturally, in this case the influence may be real, but according to the existing framework, money mass growth cannot influence either inflation or the exchange rate», Koba Gvenetadze said.

Inflation signifies money depreciation, reduction in its solvency, imbalance between demand and supply. Inflation signifies  overcharged turnover channels with excessive cash, which is not guaranteed with corresponding commodity mass growth norm. It is interesting that over the past 3 months NBG was saying it did not plan to tighten the monetary policy or make currency interventions with the aim to stop GEL exchange rate depreciation, as if this process could not make influence on growth in general price level. And we receive an absolutely different result in November, when annual inflation hit 6.9%. At the same time, the general level of inflation irreversible grows YTD and it is unclear why NBG had similar optimistic expectations.

In December the central bank recognized inflation risks in Georgian economy and tightened policy. The NBG monetary policy committee raised the refinancing rate by 25 base point to 7.25%, on December 13, 2017.

«According to the current forecasts, inflation indicator will start declining in January 2018, along with cessation of temporary factors. After previous meeting of the committee, the nominal efficient exchange rate considerably worsened and as compared to the previous forecast, inflation pressure increased (similar scenario was discussed in the November 2017 report on monetary policy). At the same time, over the past 2 months the market research indicator point to growth in inflation expectations, while improvement of economic activity more than expected weakens possibility that the demand may reduce inflation. Based on the above-mentioned, for the purpose of inflation reduction in midterm period, it became necessary to apply monetary policy instrument. At this stage, the committee has decided  to raise the policy rate by 25 base point. Further tightening of monetary policy and duration will depend on how quickly the pressure of nominal efficient exchange rate on prices will decrease.

In November annual inflation constituted 6.9%, which, along with other factors, was preconditioned by about 40% upturn in international oil prices in the second half of 2017. Influence of single factors, including excise tax growth, on inflation indicator constitutes about 3%. After neutralization of the mentioned factors, in other equal conditions, it is expected that at the beginning of 2018 inflation indicator will decline.

Economic growth indicators are demonstrating the improving demand. In October, according to an early report, economic growth made up 5.7%. In January-October 2017 economic growth constituted 4.9%, and this figure exceeds the NBG forecast indicator. Positive dynamics is recorded in exports and tourism. Money transfers volume is also growing. However, over the past months, imports volume has also risen. Despite the mentioned upturn in imports, this year we expect significant growth in the current account deficit as compared to the corresponding indicator of  2016», the NBG statement reads.

«I have backed one aspect that in 2018 the inflation will decline. This signifies that NBG assumes obligation to maintain stability of prices and inflation at around 3% and apply any instrument. NBG can satisfy all these conditions. Moreover, it is very important that NBG will use all instruments to attain this objective, including money credit policy, monetary rate, reserves management, sterilization measures, interventions and so on. This year we have inclination in terms of inflation. We had 4% inclination and today we have 6.9% inclination. NBG assumes obligation to reduce the indicator twice in 2018», Irakli Kovzanadze, head of the parliament’s finance and budgeting committee noted.

It is worth noting that over the past 2 months NBG failed to maintain the target indicators of inflation. As a result,  the real inflation has exceeded the target indicator in impressive figures. We have the same situation in 2017 too.

By Merab Janiashvili
Economic Analyst
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