After the monetary easing of 2016, the year 2017 was characterized by monetary policy tightening. The NBG gradually increased the refinancing rate from 6.5% to 7.25% to curb inflationary expectations, which were affected by several one-time shocks, such as the rise of excise tax, the increase in oil prices on the world market and the depreciation of the nominal effective exchange rate in the last quarter of 2017. Due to these factors, the NBG failed to keep inflation close to its target level of 4% in 2017. However, under the existing circumstances adopting a much stricter monetary policy would have harmed growth and deepened unemployment. According to the current forecast, holding other things constant, the monetary policy rate will decrease from the second half of 2018 by 5-6 percentage points, while inflation is expected to decline and approach its long-run target rate of 3%. The NBG’s policy did not have a strong effect on the growth rates of monetary aggregates. Growth rates of both M1 (narrow money) and M2 (broad money, excluding foreign currency denominated deposits) increased to 17% and 29.4% respectively in December 2017. The expansion was mainly due to very strong credit growth from commercial banks. Both producer and consumer prices in Georgia showed high growth in 2017. CPI annual inflation was 6%, while producer prices increased by 10.2%. The year-on-year hike in prices was mainly caused by the following factors:
a. Supply side pressure due to a hike in excise taxes on fuel, tobacco products, and car imports.
b. Sharp fuel price increases (23.7% YoY) on the international market. For Georgia, this meant an increase in transportation prices and, indirectly, an increase of domestic production costs.
c. Nominal depreciation of the Georgian lari in annual terms with respect to partner countries, which contributed to the rise of import prices.
The product categories that exhibited the highest price growth in annual terms were alcoholic beverages & tobacco, as well as transport. Prices for these product categories increased by 17.1% and 15.1% YoY respectively in 2017. Food prices were indirectly affected by higher fuel prices. Moreover, the rise of meat and dairy prices was driven by the increase in exports of live bovine animals and sheep (especially to Iraq and Iran), reducing the supply of meat and dairy on the local market. These upward pressures on the CPI and PPI led to higher inflationary expectations and provided justification for a tighter monetary policy stance by the National Bank of Georgia. Prices for clothing and footwear (-3% YoY) and communication (-0.2% YoY) were the only categories that slightly lowered annual inflation in 2017.
