BAKU, Azerbaijan, October 31
By Tamilla Mammadova – Trend:
Annual inflation rate stood higher than previously forecast and equaled 5.3 percent on average in the third quarter of 2019, Trend reports referring to National Bank of Georgia (NBG).
This increase in inflation was partly due to the higher-than-expected prices on tobacco products and certain components of the food category.
The inflationary pressure coming from the higher-than-expected depreciation of the local currency was also strong. The latter factor led to the upward revision of the inflation forecast and consequent monetary policy response.
According to the NBG's forecast, inflation will remain above the target in the next three quarters, and then, after the gradual decline in the medium term, it will be below the target.
On the whole, forecast below-target inflation rate in the end-2020 is driven by tightened monetary policy, which is ready to accommodate lower-than-target inflation temporarily in order to ensure that long-run inflation expectations decline back to the target level.
Such dynamics of the inflation forecast, on the one hand, is driven by the recent depreciation of the nominal effective exchange rate, and on the other hand, by weak aggregate demand, the bank said.
The first factor, in the short-run, puts pressure on consumer prices as it increases both import inflation and intermediate costs of companies burdened with foreign currency credit.
Still weak aggregate demand, on the contrary, puts downward pressure on prices in the short run. However, in the medium term, improving economic activity along with the appreciation of the effective exchange rate will ensure that the inflation rate is close to its target level.
“Given the present situation, we raised the monetary policy rate twice by 0.5 percentage point (pp) from 6.5 percent to 7.5 percent, and then by 1 pp to 8.5 percent. The increase of interest rate will reduce the amount of total spending in the country, which ultimately will slow down the rise in consumer prices,” said the NBG.
At the same time, higher interest rate reduces total lending in lari, while it makes savings in lari more attractive and encourages investors to use lari securities. This contributes to an increase in demand for lari and appreciation of the exchange rate.
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