Georgia: NBG continues with gradual exit from its tight monetary policy

CAUCASUS / CENTRAL ASIA - In Brief 13 Sep 2023 by Ivan Tchakarov

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The National Bank of Georgia cut the refinancing rate by 25bpts to 10.0%. This is the third rate reduction since the transition to an easing mode that was initiated in May. The rate cut was anticipated, although there was some uncertainty about the size of the step. The accompanying statement is not yet available, but we are of the view that it will repeat the key language from the previous meeting in Aug when the NBG explicitly argued that it will pursue a “gradual exit from its tight monetary policy stance”. There are signs that the bottom of price growth has passed, which warrants this cautious approach to monetary policy making. Inflation had been falling Jan 2022 when it had peaked at 13.9 percent YoY. Momentum has been gradually losing steam in subsequent months as the reversal of global food price growth was enhanced domestically by the fast-appreciating currency. As a result, headline inflation collapsed to only 0.3 percent YoY as of July 2023, although it inched up to a still modest 0.9 percent YoY in Aug. Health, transport, communications, and recreation prices were still in deflationary territory while services inflation are still growing at double digits. The evolution of food prices, which account for 34 percent of CPI index, is particularly interesting as they have been growing for the second month in a row, albeit only modestly so. As a result, food prices have now again started to contribute positively to the headline index. The Aug data suggests that the bottom of inflation was reached in July as we are now transitioning to a period of gradually accelerating price growth. We thus anticipate a return to the 3.0 percent target by the second quarter of 20...