NBG Reduces Monetary Policy Rate by 0.25 Percentage Points

The Monetary Policy Committee of the National Bank of Georgia (NBG) has decided to cut the refinancing rate by 0.25 percentage points to 8.0%.

The National Bank of Georgia reports that as expected, the inflation rate continued to decline in July and amounted to 5.7%, while at the monthly basis prices fell by 0.5%.

The NBG forecast says that under equal conditions, inflation will continue to decline over the rest of the year, fall below the target level in the first half of 2021 and then approach it from below.

The decline in inflation will be driven by weak aggregate demand. In particular, the forecast says the economy is expected to shrink by 5% in 2020, exerting the downward pressure on inflation forecast. The revision of economic growth forecast followed a larger expected decline in global economic activity and external demand than was evident in the early stages of the pandemic. At the same time, the risks of inflation expectations should also be taken into account as the inflation rate remains above the target over a protracted period.

Hence, the Monetary Policy Committee continues gradual exit from the tightened policy stance at a slower pace, reducing the rate by 0.25 percentage points.

Preliminary indicators point to a decline in aggregate demand. Based on the preliminary data, economic activity in June fell by 7.7% year on year. However, compared to April-May, there are signs of recovery in local demand, which is associated with fiscal stimulus and better-than-expected dynamics of credit activity and remittances. Preliminary data shos that revenues from international travel in June fell by 97% year on year.

Demand for exports also remains weak, with a 14% decline in June compared to the same period last year. With declining export earnings, imports also fell by 22% year on year.

"The NBG will continue to monitor the developments in the economy and financial markets and will use all instruments at its disposal in order to ensure price stability," note the representatives of the Bank. 

The next meeting of the Monetary Policy Committee will be held on September 16, 2020.

By Ana Dumbadze