“Inflation has been elevated since pandemic started with the exception of months when government-subsidized utility tariffs for low energy users” – says, Galt and Taggart. Annual inflation accelerated further from June 2021 at 9.9% and at 11.9% in July, above-average 7.4% in March-May. The global food and energy inflation, higher utility tariffs, GEL depreciation pass-through, and the acceleration of local demand – are the major drivers for inflation in Georgia that Galt and Taggart identifies in its recent report.
According to the report, the key factors affecting price spike in June than in previous months reflected higher contributions from food and energy prices, and utility tariffs (as gas tariff increased in Tbilisi from 1 June 2021), while the July price spike also reflected termination of bread subsidy. The NBG raised the key rate three times (+50bps in March, +100bps in April, and +50bps in August) this year cumulatively to 10.0%, the highest level since 2008.
“Keeping the key rate unchanged in June, the NBG expected inflation to start decelerating from 2H21 – says Galt and Taggart, adding that the inflation was unexpectedly high in July, forcing the regulator to raise the rate in August. The NBG expressed concern that running high inflation would accelerate inflation expectations. “For addressing this risk, the regulator intends to keep a tight policy stance longer, while not ruling out further hikes. We admit that the NBG has limited ability to influence household demand in the current recovery cycle or global inflationary pressures, but we see recent key rate increase supporting the GEL to remain relatively strong for limiting FX pass-through. The NBG introduced additional regulatory incentives for banks from July 2021 to promote the further de-dollarization of deposits for easing the pressure on the FX market. In our baseline scenario, we expect average inflation of 9.5% in 2021 up from the previous 6.9% forecast, and see inflation to decelerate from 2Q22 and room for a policy rate cut by 200- 250bps in 2H22” – reads the report.
