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Central Bank Raised its Refinancing Rate Again – Expert Evaluation

The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met on August 12, 2015 and decided to increase the refinancing rate by 50 basis points to 6.0 percent.

According to the central bank’s  statement, the monetary policy decision is based on the macroeconomic forecast, which indicates increase in the inflation expectations as well as in the domestic and external risks affecting the forecast inflation. In line with the existing forecast the Monetary Policy Committee considers appropriate to continue normalization of the monetary policy. Unless additional shocks occur, the monetary policy rate by the end of the year will be within 6.5 percent. The rate of further changes in the monetary policy will depend on the inflation forecast.

How do the experts assess  the central bank’s decision, whether it was necessary to raise the refinancing rate and how timely was the central bank’s this move? Economic expert Levan Kalandadze considers the National Bank’s decision very late. According to him, the National Bank should have taken the decision to tighten monetary policy at the beginning of the year when the lari slump reached  its peak.”

“The move to increase the refinancing rate is too late, by a few months. I think, in general , the National Bank, as a monetary policy institution, should review the effectiveness issue and pursue other approaches,” Kalandadze explains. According to him, on the one hand, there are monetary instruments which can be effectively used, but in reality  are not that led to inconsistent and non-result oriented monetary policy.

In his words, the National Bank did not focus on financial stability, but on  price stability, thereby virtually sacrificed financial stability. The former President of the National Bank Roman Gotsiridze, on the contrary,  hails  the central bank’s decision. He believes  this decision is correct, as the government is doing nothing to reduce the budget deficit. He expects  that inflation will soon exceed its target of 5%, and this would have happened a long time ago if not  a decline in oil prices on the world market, which is one of the factors hindering the inflation.

As for the expected outcomes,  as a result of  the  increased refinancing rate, Gotsiridze says  that the commercial sector will have to increase the cost of certain loans that  can  lead to a general increase in interest rates on loans in the credit market.