OREANDA-NEWS. January 24, 2008. The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) met today and decided to raise its main policy rate, the one-week Certificate of Deposit (CD) rate, by 100 basis points, to annual 10 percent, the bank's press service reported.

The latest information on economic activity suggests that GDP is continuing to grow in double digits reaching record level (annualized 12.6 percent) in the third quarter, 2007. Both public and private expenditures, the latter supported by large foreign capital inflows have contributed to the acceleration in economic activity. Moreover, the pick-up in export growth rates in the second quarter continued in the third quarter as well contributing to the growing aggregate demand pressure. At the backdrop of political turmoil in November, 2007 the growth in 2008 is expected to slow down.

Annual inflation, after starting to increase rapidly from August 2007, fell in December producing end-of-period inflation of 11 percent and period average inflation of 9.2 percent. As in many other countries this acceleration in the inflation rate was largely driven by strong growth in food and energy prices and the subsequent political tensions in Georgia intensifying further the inflationary expectations. Moreover, the growth in monetary aggregates and lending fuelled by increased government spending and foreign capital and financial inflows have further exacerbated inflation dynamics.

Monetary aggregates have been growing rigorously driven inter alia by rapidly expanding money multipliers and re-monetization of the economy but even after taking these special factors into account, the underlying rate of monetary expansion remains strong.

In the near-term risks to price stability remain on the upside. The current monetary overhang, increased public spending and the shift from capital to social expenditure, the forthcoming parliamentary elections, uncertainty arising from the global financial turbulence and the public’s entrenched inflationary expectations, have worsened the inflation outlook in the near-term. Therefore, a tighter monetary policy stance is required to mitigate the abovementioned risks. On the other hand, the expected decline in oil prices due to speculations about the global economic slowdown is a downside risk to price stability.

In the medium-term in the environment of large foreign capital inflows to curb inflationary pressures the macro policy mix needs to be changed to make both monetary and fiscal policies contractionary. In general, countries with large foreign inflows have responded with fiscal consolidation, therefore the government’s announced commitment to the fiscal surplus is vital.

The MPC discussed the possible changes in the reserve requirement rules and norms and decided to leave them unchanged at this stage. The NBG will closely monitor the developments in the economy with the objective of achieving the forecast inflation rate and will in due course act accordingly.       

Starting from January 2008, the MPC of the NBG will meet regularly on a monthly basis to discuss its interest rate policy. The schedule of the MPC meetings is posted on the website of the NBG. The next meeting will take place on February 20, 2008.