Milder Monetary Pressure for Stronger Pre-Election Financing
11 November, 2011
Milder Monetary Pressure for Stronger Pre-Election Financing

Easing the monetary policy rate against the backdrop of continuing price hike serves to secure stronger banking financing in the upcoming pre-election period, some experts suspect. 

“The underway lowering of monetary policy rate by the National Bank of Georgia (NBG) when prices on everything go higher and higher has no economic ground and poses inflation risks. Very likely it woos banks in order to secure funding for the election campaign of the ruling power in the upcoming parliamentary election of 2012”,

 Ditrikh Muller, an economic analyst with the Georgian Investment Group, said.

Georgian central bank lowered its monetary policy rate by 25 basis points on October 26, 2011 as inflation pressures eased to 4.6% - much below the annual target standing at 6% this year.

“As expected, the decreasing trend of inflation continued in September as well. Annual inflation stands at 4.6% as of September and core inflations remain low. Specifically, core inflation (net of food and energy) amounts to 0.5 percent,” The NBG reported.

It expects the inflation to remain low till the end of the year and decrease further at the beginning of 2012.

The International Monetary Fund local office agrees with the NBG that inflation shows reducing trends and expects its rate to be at 7% by the end-year.

Georgian experts appear skeptical toward the official statistics as the everyday transportation or shopping costs bespeak of price hike but nobody has an authentic alternative tool to double-check official statistics.

“The official statistics body of Georgia based on which the NBG makes its forecasts is the only source that can calculate inflation rate, there is no alternative mechanism to double-check these figures however you see yourself where prices stand, ” Nodar Khaduri, an economic analyst, told Georgian Journal however eluded further elaboration of inflation rate.

“Since the NBG lowered policy rate very likely they have grounds for that, central bank has the more comprehensive economic data than anybody else,” Khaduri said.

Irakli Lekvinadze, an economic analyst, agrees that prices on substantial product like food and clothes are permanently increasing  but the consumer basked based on which consumer price index is calculated (CPI) consists of 266 products and prices on some products may really slump so significantly that offset price hike on key consumer products.

“Besides economic activity is supposed to revive since credits become cheaper,” he said.

The NBG has already reduced policy rate for the third time starting this summer [from 8 percentage point 7.25 already] but credits did not get cheaper and no economic activity revived in fact, Muller counters.

“Only banks enjoy lower monetary policy rate now in order to provide government by stronger financing in the upcoming pre-election campaign as they face serious competitor now,” he said.

The ruling power spent about GEL 500 million during the previous elections and now it needs much more, perhaps billion, to compete the billionaire Bidzina Ivanishvili, who came out with political ambitions recently and promised not to spare money to win elections.

Muller believes the inflation pressure did wane as significantly as reported neither now nor in summer when the NBG started easing policy rate first time this year in July as soon as the inflation pressure eased from the May’s 14.3% to 10% in June.

The NBG backed its milder monetary policy in July by 4% drop in consumer prices caused by the downwardly going oil and wheat price tendencies at international market as well as by seasonal effect thanks to which prices on fruit and vegetables reduced in summer.

However almost doubled transportation and communal expenses making about 10-15% of household incomes could not be offset by this 4% drop, experts think.

And now when the seasonal effect goes away and fruit and vegetables along other product also are gaining prices up especially before New Year when demand and expenses increase traditionally Davit Narmania, Board Chairman of the Economic Problems Research Center, sees no prospects for easing inflation pressure.

Muller worries that ungrounded milder monetary policy may further fuel inflation.

“Economy should not be a victim of politics” he said.

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