Upward pressure on inflation persists due to rising production costs in Georgia

Finance Materials 3 February 2021 21:00 (UTC +04:00)
Upward pressure on inflation persists due to rising production costs in Georgia

BAKU, Azerbaijan, Feb.3

By Tamilla Mammadova – Trend:

The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on February 3, 2021, and decided to keep the refinancing rate unchanged at 8 percent, Trend reports via the NBG.

Annual inflation stood at 2.8 percent in January. The reduction of inflation over the last two months is related to the government subsidy of utility fees and is of a temporary nature.

Generally, central banks do not react to temporary deviations of inflation due to such exogenous factors and are guided by the medium-term inflation forecast. According to the current forecast, other things equal, inflation will remain on average around 4 percent in 2021 and then gradually approach the target.

Compared to the previous forecast, a significant increase in prices in international commodity markets is notable among the factors affecting the dynamics of inflation, which was especially prominent in January.

Moreover, upward pressure on inflation persists due to rising production costs stemming from the prolongation of pandemic-related restrictions and depreciated exchange rate. The latter, in turn, increases imported inflation and intermediate costs. On the other hand, it should be noted that, despite relatively strong domestic demand, due to the sharp decline in external demand, aggregate demand is still weak.

However, the downward impact of weak aggregate demand on forecasted inflation is weakened by the depreciation of the nominal effective exchange rate, while the high dollarization of the economy fortifies the transmission of exchange rate fluctuations to inflation. On the other hand, it should be noted that the termination of the partial subsidy of interest expenses on mortgage loans, in fact, has an effect similar to the tightening of monetary policy.

The committee also noted that uncertainty remains high about both the dynamics of the recovery of global economic activity and the growth rate of local lending. Taking into account these factors, the need to maintain a tight monetary stance was apparent. However, the committee does not rule out an increase in the policy rate in the future either.

According to preliminary data, aggregate demand is weak. Based on rapid estimates, economic activity fell by 7.9 percent year-on-year in December, while the twelve-month average is -6.1 percent. After the decline in 2020, a gradual recovery of economic activity is expected in 2021. According to current forecasts, other things equal, economic growth in 2021 is expected to be around 4 percent and its main driver would be domestic demand. In contrast, external demand will remain considerably reduced and only marginal growth is projected in 2021.

As for the current indicators, the revenues from international travelers are minimal and, according to preliminary data, decreased by 93 percent year-on-year in December. Amid weak aggregate demand and depreciated exchange rate, imports of goods fell by 18 percent year-on-year in December, while exports of goods also fell by 18 percent.

The NBG continuously monitors the developments in the economy and financial markets and will use all available tools to ensure price stability.

The next meeting of the Monetary Policy Committee will be held on March 17, 2021.


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