The monetary policy committee of the National Bank of Georgia (NBG) on December 8 increased the refinancing rate rate by 0.5 pp to 10.5%, in the fourth rate hike this year. Loose fiscal policy, imported inflation and aggregate demand have all contributed to the persistent double-digit inflation.
Georgia now has the highest monetary policy interest rate in 13 years, forced by the headline inflation that remained in November above 12% y/y for the fourth month in a row. Low base effects caused by subsidising of utilities last winter will keep the inflation rate high at least until next February.
NBG president Koba Gvenetadze commented about the fiscal policy having an impact, besides the imported inflation. But this pressure is easing in line with the fiscal consolidation planned for 2022. The public deficit is envisaged at 4.2% of GDP next year, from 6.7% this year and 9.4% in 2020.
Most of the inflation was caused by exogenous factors, the central bank explained in the comment released along with the monetary policy decision. And the inflation shock is temporary, the statement reads, although such a view is not fully consistent with the broad expectations regarding post-COVID-19 inflationary wave.
The recent inflation figure is mainly driven by temporary exogenous factors, NBG says. According to the preliminary estimates of the NBG, the contribution of such exogenous factors to the headline inflation is about 9 pp (out of 12.5% y/y inflation) in November.
Although the exchange rate has appreciated relatively y/y, the imported inflation was 18% in November, the NBG argues.
As for the aggregate demand, since the second quarter of 2021 NBG says that “it has significantly rebounded, which is due to several factors”. One of them is the fiscal stimulus. Although the budget deficit declined annually, its level is still high, which supports a high level of domestic demand.
The stronger-than-expected pent-up demand in the second quarter of 2021 speeded up the recovery of economic activity.
Moreover, the recent increase in domestic demand has been supported by accelerated lending growth as well. Strong domestic demand is a positive push for current economic activity, however, at the same time, it hinders the aim of reducing inflation.