National Bank Keeps Raising Monetary Policy Rate to Curb Inflation, but in Vain.
In October 2015, Georgia’s inflation rate marked 5.8% as compared to the same period of 2014. The inflation rate made up 0.8% compared to September 2015. The annual inflation upturn has more hit regions than the capital city. According to GeoStat, the national statistics service of Georgia, in October the annualized inflation rate in Tbilisi marked 5.1%, Telavi – 5.9%, Kutaisi -6.6%, Gori – 6.9% and Batumi – 7%.
It should be noted, for the last three months the inflation rate has missed the NBG’s target indicator (5%), while the NBG keeps raising the monetary policy rate YTD. On November 4 the monetary policy coefficient grew by additional 0.5% to 7,5%. Such a high rate was last recorded in 2011. At the same time, we should note that
Starting February 2015 the refinancing loan rate has gradually increased to 7.5% from 4.5%. Despite sharp growth in the monetary policy rate, the inflation rate increases on monthly basis.
Such an extreme growth in the refinancing rate reaffirms the inflation expectations are growing in the country and the NBG president also confirms this: “Regretfully inflation expectations are very high”, Giorgi Kadagidze told the Archevani TV program. The tightened monetary policy badly affects the economic development. To put simply, when the NBG makes the refinancing loan interest rate more expensive for commercial banks, the bank sector also have to increase interest rates on credit products. At the same time, the interest rates of some loans are directly attached to the monetary policy rate. Therefore,
The NBG-tighetned monetary policy rate has already brought negative results. The loan affixed to the refinancing rate will grow in value for 8 587 borrowers. Moreover, the GEL-denominated credits will also increase in value.
In September the average weighed annualized interest rate on GEL denominated loans rose by 1.8 points to 20.6%, while the rate on retail loans increased by 2.1% to 24.5%.
The NBG names the GEL devaluation as one of the main factors for growth in inflation, as well as the products that have increased in price after the currency depreciation.
“The supply-affecting factors determine the inflation growth tendencies. Namely, the exchange rate depreciation has increased production expenditures in value and increased prices on distinct imported products. The upturn in electricity tax has also made important influence on the inflation indicator”, the NBG statement reads. It was easily foreseeable that the GEL devaluation would increase prices in the country. However, both the Government and the NBG have paid less attention to this challenge for the last year, because they were accusing each other of the exchange rate depreciation. After reciprocal accusations during several months, the government and the NBG reached “a friendly agreement” that none of them was guilty of the national currency devaluation and both parties shifted the responsibility onto outer factors.
The Government was assuring the fiscal policy could not make negative affect on the currency devaluation, while the NBG objected to tightening the monetary policy rate because of expected rise in loan value and economic growth suspension. As a result, none of these parties changed the policy and the GEL exchange rate against USD depreciated to 2.39 point from 1.75 point for a year. The GEL rate against EUR fell to 2.60 point from 2.18 point year on year.
Author: Merab Janiashvili, Economic Analyst