The Monetary Policy Committee of the National Bank of Georgia met on November 4, 2015 and decided to increase the refinancing rate by 50 basis points to 7.5 percent.
The monetary policy decision is based on the macroeconomic forecast, according to which the National Bank of Georgia continues the monetary policy tightening in response to increased inflation expectations. Further changes in the monetary policy will depend on the inflation forecast, factors affecting it and on general state of the economy.
According to the current forecast, in the beginning of 2016 the inflation will remain above its target value, will start decreasing afterwards and will return to its target value of 5% in the second half of 2016. The annual growth in consumer prices equaled 5.8% in October. The main factors causing rise in inflation are still coming from the supply side, namely the increase in the input costs of production due to exchange rate depreciation and higher prices on certain imported goods. An important impact on the inflation came from the one-time increase in the electricity tariff. The rise in inflation has been limited by the weak aggregate demand and decrease in the world prices of oil and food products.
The real GDP growth in the second quarter was consistent with the forecasts. According to preliminary forecasts the real growth since the start of the year was 2.7%. The factor hindering the growth is the external sector, which, given the dire economic situation in the region negatively affects the income from export of goods and services. The domestic demand is also weak, as a result of the decline in remittances and increase in the service burden of foreign currency denominated loans due to the changes in the GEL/USD exchange rate.
There have been some positive developments in relation to the elimination of external imbalance. Given the decrease in foreign currency inflows the change in the exchange rate has caused import to adjust. Since the beginning of the year the import has decreased by 14 percent (excluding the import of hepatitis C treatment medications). Accordingly we can assume that the impact of the existing external shock on the exchange rate has been exhausted. Other things equal no additional pressure can be expected on the exchange rate coming from the existing external shock.
The NBG will continue to monitor the developments in the economy and financial markets and will use all means and instruments at its disposal in order to prevent the negative expectations that have been on the rise in the recent period from growing into inflationary process. The dynamics of further changes in monetary policy will depend on the dynamics of expected inflation, tendencies in economic growth, global and regional economic environment.