Georgia: National bank holds rates steady, but only temporarily

CAUCASUS / CENTRAL ASIA - In Brief 21 Jun 2023 by Ivan Tchakarov

---

The National Bank of Georgia (NBG) kept the refinancing rate unchanged at 10.50 percent on Jun 21st. This follows the 50bpt rate-cut at the previous meeting in May and, in our view, does not signal a reconsideration of the decision to gradually enter a rate-cutting cycle. Rather, it signifies a cautious approach to assessing underlying inflation risks and, possibly, a desire to evaluate the effects of the May rate cut. We thus see a steady decline in the policy rate to around 8.50-9.00 percent by year-end. The National Bank of Georgia (NBG) has generally started to ease policy. The central bank had been on a rate-hiking cycle since early 2021 when the policy rate was at 8.0 percent. The rate was increased to 10.5 percent by the end of 2021 and further to 11 percent in Mar’ 2022. The fast deceleration of headline inflation and the forecast halving of GDP growth in 2023 from the very high 10.1 percent showing in 2022 have warranted the shift to a gradual monetary easing, which the NBG commenced in early May by cutting the policy rate by 50bpt to 10.5 percent. There will be more room to continue easing given the more favorable inflation and growth dynamics. Inflation has lost steam and is likely to remain below the 3 percent target by the end of the year. Inflation had been inching up since the beginning of 2021 chiefly on higher food prices, hitting 13.9 percent YoY in Jan’2022, although momentum has been gradually losing steam in subsequent months as the reversal of global food price growth got enhanced domestically by the fast-appreciating currency. As a result, headline inflation has collapsed to only 1.5 percent YoY as of May’2023, and the confluence of existing macr...