The estimated GEL REER remains around 12% below its medium term average, indicating a substantial undervaluation.
On the 31st of July the NBG stated that the recent sharp move of the GEL already creates inflationary risks and auctioned 40 mln USD on the interbank FX market. To stress its commitment, central bank announced that it will intervene again on the FX market and/or utilize other monetary policy tools as necessary to contain inflation risks.
On the 1st of August out of the 40 mln USD 32.8 mln was absorbed by the market as the floor was defined at somewhat stronger than the same-day official exchange rate, indicating the expectations of even stronger appreciation among the market participants. These expectations were reconfirmed by the further appreciation of the GEL on the next trading day.
Even taking into account the recent reversal of the USD/GEL and somewhat stronger dollar worldwide, the inflation is expected to pick up unless the USD/GEL strengthens further.
The annual inflation stood at 4.6% in July 2019, 0.3 PP higher compared to the 4.3% in the previous month. After a temporary drop in June, the seasonally adjusted annualized inflation came in at 10.2%, indicating that the inflation pressures are building up. An important driver was the weaker GEL real effective exchange rate.
Over the same period, the annual inflation amounted to 3.9% without 0.7 pp impact of a higher excise tax on tobacco, according to the newly published estimates of Geostat.
In terms of products, higher prices on food and non-alcoholic beverages (+7.9% YoY), alcoholic beverages and tobacco (+13.7% YoY), and transport (+3.9% YoY) contributed the most to the annual inflation. At the same time, prices went down on clothing and footwear (-7.1% YoY). A more moderate price decrease was observed in the communication sector (-2.4% YoY).
According to the latest central bank baseline projections published in the Monetary Policy Report, inflation is expected to remain above the target level until Q2 2020 before moving closer to it.
Source - TBC Research
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