The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) decided to keep the refinancing rate unchanged at 8% after the meeting which was held today.
According to the NBG’s current forecast, other things equal, the inflation rate will hover close to the target level in the first half of 2021. Annual inflation has been at 3.8 percent in recent months.
“Inflation dynamics is mainly determined by weak aggregate demand and this impact is expected to persist next year as well. Still, the effect on aggregate demand coming from increased pandemic-related social and economic support fiscal measures of 2020-2021 is noteworthy” – reads the official statement issued today.
According to the statement, the Monetary Policy Committee also took into account the supply-side factors, such as the increase in production costs due to additional restrictions in the wake of the pandemic, and it also took note of the uncertainties surrounding the prolonged pandemic and the global restrictions.
“Moreover, due to the still high dollarization of the economy, the room for easing monetary policy is limited. According to the current estimates, a tight monetary policy may be necessary for longer, subject to inflation expectations and the dynamics of economic activity. Depending on the economic developments, the Committee does not rule out the need for an increase in interest rate in the future” – reads the statement.
NBG assesses aggregate demand as weak, drawing on preliminary indicators. As the rapid estimates show, economic activity fell by 3.9% year-on-year in October and by 5.1% over the first ten months of the year.
According to NBG, after the decline in 2020, economic activity is expected to recover gradually from 2021. “According to the current forecasts, other things equal, domestic demand will be the main driver of economic growth in 2021. In contrast, external demand remains significantly reduced and slow growth is projected for 2021 as well” – the statement from the Central Bank reads.
The revenues from international travelers are minimal and, according to preliminary data, fell by 94% year on year in October. Amid weak aggregate demand, imports of goods fell by annual 24% in October. After a small increase in the previous month, exports declined again. In contrast, the high growth of remittances persists.
As part of Covid-19-related measures, the European Central Bank (ECB) and the NBG agreed to launch a €100 million euro repo line to support liquidity. This line was introduced under the framework of the Eurosystem repo facility for central banks (EUREP). The purpose of the instrument is to supply euro liquidity to the Georgia's financial system in case of need. The mechanism will be in force until June 30, 2021, and its operational support will be provided by the German Bundesbank.
“The NBG continues to monitor the developments in the economy and financial markets and will use all available tools to ensure price stability” – the statement concludes.
The next meeting of the Monetary Policy Committee will be held on February 3, 2021.
