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What is Monetary Policy?

Monetary policy consists of the actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates.

Monetary policy is maintained through actions such as modifying the interest rate, buying or selling government bonds, and changing the amount of money banks are required to keep in the vault (bank reserves).

The main objective of the monetary policy of the National Bank of Georgia is to maintain price stability. Price stability implies the existence of a moderate and predictable rate of inflation, which is a necessary precondition for long run economic growth.

Furthermore, the NBG supports financial system stability and promotes the country’s economic growth as long as the latter objectives do not come into contradiction with its main goal – maintaining price stability. Monetary and exchange rate policies serve the objective of preserving the purchasing power of the national currency, raising the growth potential of gross domestic product, and improving the investment climate.

The main objective of the National Bank of Georgia is defined by the Organic Law of Georgia on the National Bank of Georgia. The inflation target and the main instruments of monetary policy are listed in the “Main Directions of Monetary and Exchange Rate Policies” that is developed annually by the Monetary Policy Committee and approved by a resolution of the Parliament of Georgia.

In the conduct of monetary policy, the National Bank of Georgia is independent from the legislative and executive authorities within the limits of the rights granted to it under the Organic Law of Georgia on the National Bank of Georgia and the Constitution of Georgia. Inflation targeting regime The monetary policy regime of the National Bank of Georgia is inflation targeting.

This regime implies the announcement of an inflation target in advance. In the long-run the desirable rate of inflation in Georgia is 3%. It should be noted that developing countries tend to be characterized by high levels of inflation, which is mainly caused by a rapid growth in productivity.

At the current stage of economic development in Georgia, the inflation target is set for the medium term at 5% for 2016 years, and for 2017 – 4%. For 2018, the inflation target of the National Bank of Georgia will decrease to its long-run level of 3%. In order to maintain price stability, the National Bank of Georgia uses short-term interbank interest rates (up to 7 days) as an operational target.

By setting the monetary policy rate, the NBG tries to influence short-term interest rates on the interbank market. Consequently, this impact is initially transmitted to short-term, and afterwards to long-term, rates of commercial banks and ultimately affects aggregate demand in the economy. The main monetary policy instrument of the National Bank of Georgia is the one-week refinancing loans that are disbursed to commercial banks on an auction basis. The NBG actively uses other instruments as well, such as minimum reserve requirements; open market operations with certificates of deposit and treasury securities; standing facilities of overnight loans and overnight deposits; and guaranteed refinancing loans.

To avoid the systemic problems in the banking sector and the possible development of a crisis in situations of temporary financial difficulties of commercial banks and/or a severe liquidity deficit, the National Bank of Georgia will act as a lender of last resort for commercial banks.

The more effective the monetary policy instruments, the lower the social cost of maintaining price stability. Consequently, the National Bank of Georgia permanently works to develop/improve monetary policy instruments and increase the efficiency of its monetary transmission mechanism.