Milder Monetary Policy To Woo Banks
26 January, 2012
Milder Monetary Policy To Woo Banks

Central Bank of Georgia goes ahead with milder monetary policy but no increase in economic activity ensues as a result. Only banks that can have loans for lower interest rate at Georgian Central Bank seem to take benefits.  


The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on January 18, 2012 to lower its Main Policy Rate (the refinancing rate) by 25 basis points to 6.5 percent. The NBG makes the refinancing rate milder by 25

basis points almost each month starting the July of 2011 cutting the rate from 8% fixed during the first half of 2011 to 6.5% ultimately.

Based in the NBG data, the annual inflation remained low in December of 2011, at 1.9%. Core inflation (net of food and energy) is still low as well amounting to 0.4%. According to the existing forecasts, inflation is expected to remain low in the first half of the year but this trend is expected to be changed starting summer although the inflation rate will remain below the target [6%], the NBG believes.

The trade deficit keeps increasing in the recent period, mostly due to the increase in imports.

According to the NBG, the expected decline in the economic activity of EU countries is supposed to have a negative impact on the trade balance of Georgia, which will possibly result in additional weakening of the aggregate demand in the country.

“Existing forecasts indicate that given the unchanged policy stance, the inflation rate will remain below the target. Hence the MPC of the NBG considered it appropriate to continue easing the monetary policy and decided to decrease the refinancing rate by 25 basis points. The NBG considers that at present the recent monetary easing will be sufficient to keep the inflation in the medium term at the target level,” the NBG statement reads.

However the existing price hike on food and primary goods make some experts as well as consumer to question official statistics as well as the ease of monetary policy. Some economic analysts think the underway milder monetary policy is not pertinent against the backdrop of the parliamentary elections 2012 in prospect and impending global economic crisis when the EU and the US have to handle with default risks.

Ditrikh Muller, a financial analyst with the Georgian Investment Group, thinks this elections  must be an unprecedented expensive  for Bidzina Ivanishvili, Georgian tycoon with up to USD 6 billion in pocket, founded an oppositionist political party and plans to participate in the elections.

“Food prices increased by around 20% compared to the past year our everyday expenses show and how can the inflation rate stand at 2%?” Muller wonders. “If milder monetary policy is a reasonable move grounded on economic factors it should be resulted in decreased interest rates and increased economic activity, but I see no token of it.”

Nodar Khaduri, an economic analyst, does not have big trust in official statistics either and see no lower interest rates or more vivid economic activity but he believes that the annual inflation rate really decreased to 2% much below the targeted 6%. But consumers cannot feel this relief as far as they compare prices with the 2009 when they were much lower.

But too low inflation rate may cut down the GDP and revenue figures lower in 2012 for the state budget 2012 is planned on 6% of inflation.

“Therefore the NBG eases policy rate to keep inflation in line with this year’s target figure, and that’s right.  Otherwise the macroeconomic data of GDP and revenues will decrease,” he elaborated.”Banks do not cut down interest rates as far as they observe the long-term trends. They reduce rates only if they believe that the inflation rate will go down in longer prospect.”

That seems scarcely possible as all international forecast as well as the NBG expects inflation pressure get tighter starting summer.

On the other hand the recent TV ad-rolls of banks touting deposits at special [higher] interest rates makes one presume that interest rates on credits are not supposed to decrease. Muller supposes that banks are the single commercial bodies that enjoy the lowered policy rate for they take loans under lower rates at the NBG.

“This milder monetary policy seems like a pre-election move to woo banks alone in order get bigger financing for the pre-election campaign, this will be incomparably expensive elections you know for Ivanishvili participates in its and promise not to spare finances and the ruling power needs much bigger resources than it needed for any other elections before,” Muller said.


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