The National Bank increased its refining rate by 1%

The Monetary Policy Committee meeting was held on October 23. As a result, the National Bank of Georgia (NBG) increased its refining rate by 1% to the point of 8.5%.

In September, annual inflation was 6.4 percent. Inflation, higher than the target is caused by nominal effective exchange rate depreciation, along with temporary factors. According to the forecast, in other equal conditions, inflation will remain above the target level this year, starting to decline from March 2020, and in the medium term, it will remain close to the target indicator.

Since September this year, the National Bank has begun tightening policies aimed at neutralizing inflationary pressures following the exchange rate depreciation. In the last two sessions, the interest rate has increased by 1 percentage point and, as stated in the decisions, the tightening of the policy will continue until the pressure on the exchange rate is eliminated.

The nominal effective exchange rate of the GEL remains at an impaired level and is pushing up inflation. The latter is only partially offset by aggregate demand, as compared to the previous period, preliminary indicators indicate that economic growth has accelerated. Based on the above, at yesterday’s meeting, the Monetary Policy Committee decided to increase the refinancing rate by another percentage point. Further decisions by the Monetary Policy Committee will depend on how quickly inflationary pressure on the exchange rate will be eliminated.

“According to preliminary data, the improvement of the current account balance continued in the third quarter. Maintaining positive external sector trends, along with tightening monetary policy, will help to strengthen the exchange rate through expectations and, as a result, provide the desired dynamics of inflation over the medium term,” reads the report of the committee meeting.

“When we talk about raising the monetary policy rate today and its impacts on the economy, let's not forget, in this case, this is the leverage on the Lari’s side; At the same time, we have recently reduced the reserve requirement for foreign currency-denominated loans with reserve requirements, which means that we have mobilized additional liquidity in a system that can provide more dollar loans, provide more dollar liquidity, this was the pressure will decrease on both, exchange rate and inflation,” commented the NBG president, Koba Gvenetadze.

“Despite the regulations, the growth of the financial sector portfolio is quite good, at around 13% without the effect of the exchange rate. At the same time, what is important is the change in portfolio composition. Corporate loans as well as loans to small and medium-sized businesses are growing. On an annual basis, corporate lending rose by 19.6% at the end of September, small and medium-sized business lending rose by 19.2% and retail lending rose by 6.1%.

In this case, we are analyzing all the information and in order to make the process easier if there is excessive bureaucracy, we want to simplify these regulations …There will be discussions with both the banking association and representatives of the financial sector and once we are convinced that this is to be done, then we will make a decision in this direction,” explained Gvenetadze in response to a question about the possible softening of banking regulations, as businesses have been actively pushing and talking about the need for it lately.

The next meeting of the Monetary Policy Committee will be held on December 11, 2019.