The National Bank of Georgia increased its key rate by 25 basis points to 6.75% and announced further “gradual” tightening of the monetary policy in the course of the next two quarters.
NBG said in a statement on January 25, that “the decision is based on macroeconomic forecasts,” according to which, NBG expects that this year’s inflation rate “will be above its target, despite weak pressure on inflation by demand.” NBG however, added that the inflation rate would decrease in 2018 and remain below the 3% target.
The government forecasts 4% annual inflation in 2017 and 3% – in the following two years.
Georgia’s annual inflation stood at 1.8% in December that, according to NBG, will further increase due to “one-off factors” – increase of excise taxes and exchange rate fluctuations.
“Since these circumstances have increased inflation expectations, to curb these expectations, the National Bank deems it reasonable, based on the existing forecasts, to gradually increase the key rate to 7% within the next two quarters,” the statement reads.
The National Bank hopes that the inflation rate “will decrease along with expiration of one-off effects” and “return to its target in the medium term.”
“All other things being equal, along with expiration of factors affecting inflation, the key rate will return to its neutral level in the medium term,” the bank said.
NBG started tightening its monetary policy from February 2015 pushing the key refinancing rate from 4% in February up to 8% by the end of the year. The rate remained unchanged at 8% in the first three months of 2016 but went through gradual easing beginning from April and remained unchanged at 6.5% since September, 2016.
The next meeting of NBG’s monetary policy committee has been scheduled for March 7, 2017.