The Monetary Policy Committee (MPC) of the National Bank of Georgia decided to increase the refinancing rate by 0.5 pp. The monetary policy rate is 10.5 percent.
The extraordinary situation caused by the pandemic has created many challenges for the world economy, with high inflationary environment to be particularly concerning. Increased inflation remains one of the main recent issues for Georgia as well. Annual inflation slightly declined to 12.5% in November. Even though the recent inflation figure is mainly driven by temporary exogenous factors, it is high nevertheless. According to the preliminary estimates of the NBG, the contribution of such exogenous factors to the headline inflation is about 9 pp in November. A surge in consumer commodity prices on international markets is of particular importance, which is transmitted to the local market through imported raw materials and final goods. Although the exchange rate has appreciated relatively year-on-year, the imported inflation was 18% in November. The statistical methodological impact of the utility tax subsidy on current inflation is also noteworthy. As noted in previous committee decisions, it will have a temporary additional contribution to the annual inflation rate in December 2021 and January-February 2022.
As for the aggregate demand, since the second quarter of 2021 it has significantly rebounded, which is due to several factors. One of them is the fiscal stimulus: although the budget deficit declined annually, its level is still high, which supports a high level of domestic demand. Moreover, the stronger-than-expected pent-up demand in the second quarter of 2021 speeded up the recovery of economic activity. Moreover, the recent increase in domestic demand has been supported by an accelerated lending growth as well. Strong domestic demand is a positive push for current economic activity, however, at the same time it hinders the aim of reducing inflation. The increased differential between interest rates on lari and foreign currency loans, due to the tightening of monetary policy, contributes to a recent foreign currency lending growth, which is a source of foreign exchange risks in the economy. To prevent the accumulation of such risks, the Financial Stability Committee has taken additional measures, which will also help to improve the efficiency of monetary policy in the medium term. Given strong supply shocks, it is also important to make sure that prolonged high level of inflation does not transmit to long-term inflation expectations. Taking into account these factors, the Committee decided to further tighten monetary policy and increased the policy rate to 10.5%. Inflation is expected to increase temporarily in the coming months due to the above-mentioned base effect of the utility bill subsidy, although it will start declining from spring. The gradual reduction of inflation, along with the fading-out of one-off factors, will be facilitated by planned fiscal consolidation and tighter monetary policy. A precondition for the future reduction of the policy rate will be significantly reduced inflation and inflationary expectations.
In the wake of the global economic recovery, external demand continues to grow. In January-October exports increased by about 25% annually, while the increase compared to the same period in 2019 is 11%. Revenues from international travelers have almost doubled annually based on ten months data, although the decline from the 2019 level is still significant (65%). Imports have also increased, against the backdrop of higher domestic demand: in January-October it grew by 22% year-on-year, whereas compared to 2019 the growth is about 3%.
The NBG continuously monitors the developments in the economy and financial markets and will use all available tools to ensure price stability.
The next meeting of the MPC will be held on February 2, 2022.