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National Bank of Georgia Lowers Refinancing Rate to 7.5%

National Bank of Georgia Lowers Refinancing Rate to 7.5%

The monetary policy committee of the National Bank of Georgia (NBG) has lowered the refinancing rate by 50 base points to 7.5%.

The NBG statement reads that the decision reflects the macroeconomic forecasts proving that tightening of monetary policy in 2015 has made positive effect on inflation rate.

Under the existing forecasts, the annualized inflation rate in the coming quarters will moderately decrease and be maintained below temporary target indicators, while the indicator will reach the target figure at the end of 2016.

The forecast inflation declination has been largely preconditioned by the reduction of inflation expectations.

The annualized inflation in March decreased by 4.1% (the inflation rate marked 5.6% in February).

Expiration of base effects of one-time factors and reduction in inflation expectations have considerably preconditioned declination in annual inflation rate.

According to the NBG forecast, in 2016 economic growth will be around 3%. Last period investment inflows intensification, especially in the development sector has positively affected the economic growth.

The tendency will be expectedly continued throughout the year. However, increased interest rate on GEL-denominated loans and deceleration of total credit portfolio weakens the joint demand. Economic activity remains low because of negative effects from the existing economic situation in Georgia’s trading partner countries. This factor is reflected in reduction of external demand and money transfers.

Based on the above mentioned, the monetary policy committee thinks that the tightened monetary policy regime should be gradually smoothed and the refinancing rate should be gradually lowered in the midterm period to the neutral level.

According to the NBG evaluations, the policy rate neutral level is around 5-6% in the midterm period. As a result, the committee has taken a decision on lowering the policy rate by 50 base points. The monetary policy further alleviation depends on the new inflation forecast indicators.

At the same time, to promote GEL-denominated resources, the monetary policy committee has decided to lower the minimal reserve requirement on GEL-denominated resources to 7% from 10%. At the same time, to smooth expected risks on financial stability, the minimum reserve requirement on USD-denominated resources grows to 20% from 15%.

The national bank will continue supervising the ongoing economic developments in the country and the financial markets and use all leverages to ensure the stability of prices, the NBG statement reads.

The next meeting of the NBG monetary policy committee will be held on June 15, 2016.