OREANDA-NEWS. The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) decided to increase the refinancing rate by 100 basis points to 7.0 percent.

The monetary policy decision is based on the macroeconomic forecast, which indicates a sharp increase in the inflation expectations given the Lari depreciation against the USD, which raises the future risks as a result of a one-time deviation from the inflation target. In line with the existing forecast the Monetary Policy Committee considers appropriate to increase the interest rate by 1.0 percentage point to 7.0 percent.

The annual growth in consumer prices equaled 5.4% in August. According to the current forecast, after the temporary deviation from the target the inflation will return to the target level by the end of 2016. The main factors causing rise in inflation are still coming from the supply side, namely the increase in the intermediate costs due to exchange rate depreciation and higher prices on certain imported goods. An important impact on the inflation came from the one-time increase in the electricity tariff. The rise in inflation has been limited by the weak aggregate demand and decrease in the world prices of oil and food products.

The real GDP growth in the second quarter was consistent with the forecasts. The factor hindering the growth is the external sector, which, given the dire economic situation in the region negatively affects the export of goods and services. The domestic demand is also weak, as a result of the decline in remittances and increase in the service burden of foreign currency denominated loans.

There have been some positive developments in relation to the elimination of external imbalance. Given the decrease in foreign currency remittances the change in the exchange rate has caused import to adjust. In the five months since April the import has decreased by 20 percent (not taking into account the import of hepatitis C treatment medications, funded through the grant). Accordingly we can assume that the impact of the existing external shock on the exchange rate has been exhausted. Other things equal no additional pressure can be expected on the exchange rate coming from the existing external shock.

The NBG will use all means and instruments at its disposal in order to prevent the negative expectations that have been on the rise in the recent period from growing into inflationary process. The dynamics of further changes in monetary policy will depend on the dynamics of expected inflation, tendencies in economic growth, global and regional economic environment.

The next meeting of the Monetary Policy Committee will be held on November 4, 2015.