Monetary Policy - Down, Prices and Interest Rates - Up
24 November, 2011


Georgian Central bank lowered its policy rate by 25 basic points for the fourth consecutive time starting the past July as inflation pressure got milder. However, interest rates on credits as well as consumer prices on essential product are still soaring high. The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on November 22, 2011 and decided to lower its Main Policy Rate (the refinancing rate) by 25 basis points to 7% as annual inflation fell even

further in October, dropping to 2.3%. Core inflation (net of food and energy) is low as well, amounting to -0.2%.

“The decrease in the inflation rates was anticipated, although the actual decrease in the recent period is somewhat higher than one would have expected,” the NBG reported.

According to the existing forecasts of the NBG, inflation is expected to remain low till the end of this year and the first half of the next one. Starting in summer 2012 the moderate increase in the inflation rate is expected, although according to forecasts, given the unchanged policy stance, the inflation rate will remain below the target (6%).

However the fact each consumer faces every day is permanent price-hike on food and cloths. Moreover, the coming New Year holidays generally is associated with the increased prices on food and expenses that triggers inflation high at this time of the year. Besides, the seasonal effect that cut down prices on fruit and vegetables in summer and fall goes away thus creating inflation risks, Davit Narmania, Board Chairman of the Center for Economic Problems Research (CEPR), fears.

Also taking into account upcoming elections that usually increase governmental expenses in social programs and forecast of world food organizations on imminent price hike on food, plus doubled transport fees, some economic analysts appear skeptical toward official statistics reporting on milder inflation pressure allegedly making  grounds for easing monetary policy and fear inflation pressure may start rising soon.

Some economic analysts think the milder monetary policy will boost economic activity but the fact is that in spite the NBG lowered monetary policy for the fourth time already starting this past July, interest rates on credits and deposits still remain high and no economic activity ensued.

According to Irakli Kovzanadze, an economic analyst, the NBG eases policy rate quite insignificantly that cannot cut down interest rates at commercial banks. He does not expect any lowering of interest rates at Georgian market in near future as high rates are defined by lack of crediting resources.

“We [banking sector] got enough resources [thanks to international aid in 2008 after August war] but  such a large scale support is not supposed in future so demand on internal resources will increase therefore interest rates on deposits and credits increase,” he explained to Georgian Journal.

Kovzanadze believes the inflation did really wane thanks to the NBG efforts starting early in February of 2011 but population cannot perceive this reality because the consumer basket is tricky: it consists of 266 product including cars, furniture, air-tickets and while prices on essential product like food increases it is offset by 90% drop in air-tickets’ prices for example.

“But only about 10% of population buys air-tickets that’s why consumer cannot feel that the inflation pressure eased,” he explained to Georgian Journal.

Kovzanadze believs inflation pressure will not increase by New Year factor as not only expenses but demand also increase, organizations have currency remnants by the end of the quarter-and-year and Lari will get even stronger.