NBG Decided To Keep The Monetary Policy Rate Unchanged At 8%
Inflation remains close to the target level of 3%. As of April, annual
inflation stood at 3.4%, while core inflation, which excludes the
prices of food, energy products, and cigarettes - items characterized
by significant price volatility - was 2.3%. This year, inflation
dynamics are, on the one hand, driven by the increasing international
food prices, which, for now, are partially mitigated by the relatively
stable exchange rate of the lari against U.S. dollar driven by the
global depreciation of the U.S. dollar. On the other hand, alongside
international factors, the increase in food inflation has been partly
attributed to the one-off rise in bread prices in the local market
starting from March 2025. It is important to note that domestic
economic fundamentals continue to support price stability.
Specifically, improved production capacity partially offsets the price
pressures stemming from strong aggregate demand. At the same time,
long-term inflation expectations remain stable, as indicated by both
the domestic (excluding the bread price effect) and service inflation
measures, which remain close to the target level of 3%.Against the
backdrop of global economic uncertainty, risks affecting inflation in
both upward and downward directions have emerged. On the one hand,
recent global developments highlight signs of economic fragmentation,
which amplify stagflationary risks. This, in turn, creates risks for
increased imported inflation in Georgia. On the other hand, as
previously noted, the global weakening of the U.S. dollar index (DXY)
has led to an improvement in the lari’s position relative to the
U.S. dollar. This reduces the debt burden of dollar-denominated loans
and, consequently, alleviates inflationary pressures through this
channel. Meanwhile, in the context of declining global demand and
expectations of increased oil supply, international oil prices are
falling. This, along with the lari’s stable position against the
U.S. dollar, has a disinflationary effect.Economic activity in Georgia
remains robust in tandem with maintained price stability.
Specifically, in the first quarter of 2025, real GDP growth averaged
9.3%. This is largely driven by structural changes in the economy, as
reflected in the sustained strong contribution of productive sectors
to GDP growth. At the same time, strong domestic demand also plays a
key role in supporting high economic growth. This leaves demand-side
price pressure as a noteworthy factor to consider.Considering
increased global uncertainty, domestic tendencies and expectations in
financial markets, the NBG's central scenario projects that inflation
will temporarily exceed the target in 2025, stabilizing around 3% in
the medium term. Due to the relatively slow pace of normalization of
fundamental economic factors in the economy and strong current
economic growth, real GDP growth in the central scenario for 2025 has
been revised upwards from 5% to 6.7%, compared to the previous
scenario. In the long term, it is expected to stabilize within its
potential level of 5%.Given the increasing uncertainty, the Monetary
Policy Committee has, on one hand, considered a high-inflation risk
scenario, where the realization of fundamental factors would require a
higher path for the policy rate compared to the central scenario. The
high-inflation scenario is primarily based on the recent increase in
uncertainty in international markets, which is fueled by tariff policy
and the acceleration of economic fragmentation. The materialization of
these risks, in turn, would disrupt supply chains and create a
globally high-inflationary environment, which would subsequently have
an impact on Georgia.On the other hand, the Monetary Policy Committee
considered the low-inflation risk scenario, where the realization of
fundamental factors would require a lower trajectory for the monetary
policy rate compared to the central scenario. The increased global
uncertainty and tariff policies may accelerate the diversification of
trade worldwide, resulting in the reallocation of supply chains and
regionalization. In this process, Georgia's role as the "Middle
Corridor" country will be further strengthened. Moreover, under this
scenario, the U.S. dollar will remain globally weakened, and against
the backdrop of these tendencies, the appreciated exchange rate of the
lari will exert downward pressure on overall inflation through the
import inflation channel.Following discussions on all of the above,
the Monetary Policy Committee has considered it optimal to maintain a
cautious approach toward the further normalization of the policy rate
and decided to keep the monetary policy rate unchanged at 8%. Upcoming
decisions on the policy rate will depend on the analysis of risks and
resulting updated macroeconomic forecast scenarios.The NBG will use
all available instruments to maintain price stability. This means
keeping the overall price level increase close to the 3% target over
the medium term.The next meeting of the Monetary Policy Committee will
be held on June 18, 2025.
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