BAKU, Azerbaijan, August 16
By Tamilla Mammadova – Trend:
Annual inflation accelerated further from June 2021 at 9.9 percent and at 11.9 percent in July, above-average 7.4 percent from March through May in Georgia, Trend reports via the leading investment bank in Georgia Galt and Taggart.
The global food and energy inflation, higher utility tariffs, lari depreciation pass-through, and the acceleration of local demand – are the major drivers for inflation in Georgia.
According to the report, the key factors affecting the price spike in June compared to previous months reflected higher contributions from food and energy prices, and utility tariffs (as gas tariff increased in Tbilisi from 1 June 2021), while the July price spike also reflected termination of bread subsidy. The National Bank of Georgia (NBG) raised the key rate three times (+50 bps in March, +100 bps in April, and +50 bps in August) this year cumulatively to 10 percent, the highest level since 2008.
“Keeping the key rate unchanged in June, the NBG expected inflation to start decelerating from 2H2021", says Galt and Taggart, adding that the inflation was unexpectedly high in July, forcing the regulator to raise the rate in August. The NBG expressed concern that running high inflation would accelerate inflation expectations.
“For addressing this risk, the regulator intends to keep a tight policy stance longer, while not ruling out further hikes. We admit that the NBG has limited ability to influence household demand in the current recovery cycle or global inflationary pressures, but we see recent key rate increase supporting the lari to remain relatively strong for limiting FX pass-through. The NBG introduced additional regulatory incentives for banks from July 2021 to promote the further de-dollarization of deposits for easing the pressure on the FX market. In our baseline scenario, we expect average inflation of 9.5 percent in 2021 up from the previous 6.9 percent forecast, and see inflation to decelerate from 2Q2022 and room for a policy rate cut by 200- 250 bps in 2H2022”, reads the report.
“Strong recovery along with tight monetary policy and resumed tourism helped lari to partially regain its value vs. dollar from May 2021", reads the report.
Galt and Taggart do not expect sharp volatility in the FX market in 2H2021, with lari ranging 3.1-3.2 in this period.
“In case of sharp volatility, NBG expresses readiness to intervene, which will support to limit FX-pass through on inflation. We see lari’s strong appreciation potential from 2022 amid an expected full recovery in tourism (we assume tourism to recover to 36 percent of 2019 level in 2021)”, reads the report.
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