Baku, Azerbaijan, October 12
By Tamilla Mammadova – Trend:
Inflationary pressures have remained high in Georgia because inflation jumped sharply in September to reach 6.4 percent year-on-year, Trend reports referring to the TBC Research Group at Georgian TBC Bank.
Higher inflation in September was broad based across a number of products, both imported and domestic, indicating that besides direct cost-push pressures stemming from the undervalued exchange rate; higher inflation expectations are also building up.
The lari remains significantly undervalued and, unlike previous depreciation peaks, has remained so for a relatively prolonged time, having even stronger pass through on prices.
The National Bank of Georgia (NBG) has continued to deploy more of its tools to address the undervalued exchange rate. After two rate hikes and foreign exchange (FX) interventions, NBG amended the reserve requirements for FX funds from 30 percent to 25 percent, increased the treatment in the liquidity coverage ratio (LCR) from 75 percent to 100 percent and increased the remuneration rate.
The intention is to increase the supply of FX loans to the economy, in line with the usage of reserve requirements in a cyclical way. According to NBG, banks are likely to be left with an estimated $700 million of additional FX liquidity what increases available FX even further and should result in lower FX loan and/or deposit yields, higher FX credit and shift in the expectations to some extent.
This is a welcome step as the balance between the lari and the FX credit has shifted too much this year, placing additional pressures on the lari exchange rate through more savings in FX and more borrowing in lari.
"Unless the Real Effective Exchange Rate (REER) of lari strengthens by around 5 percent, we expect a further tightening in laru in the form of an additional 50 basis points rate hike during the NBG’s late October MPC meeting, possibly combined with some form of quantitative tightening," said TBC Research.
Further relaxation of FX lending standards is not ruled out. Judging from the latest data releases, even if REER of strengthens by a few percentage points, around 7 percent Consumer price index (CPI) inflation at the end of the year appears to be unavoidable taking into account the lagged effects of the exchange rate depreciation and the low base effect in October and December.
At the same time, according the company, NBG will continue to tighten the policy rate until lari strengthens and will manage CPI inflation to be closer to the target in the second half of 2020 and thereafter.
“In our baseline scenario, we project REER of lari to strengthen by around 5 percent, which given the recent effective exchange rate implies a USD/lari exchange rate at around 2.8-2.85", noted the research.