WASHINGTON: Georgia’s central bank expects inflation to be above its target rate of 4 percent in 2017 and plans moderate tightening of the monetary policy rate in the medium term, the central bank head told Reuters on Saturday. The former Soviet republic, through which pipelines carry Caspian oil and gas to Europe, has been hit by a decline in exports, a plunge in the currencies of its main trade partners and strengthening of the U.S. dollar. “Inflation is going to be higher than the target of 4 percent throughout 2017, but in 2018 we expect it to be lower than the target of 3 percent,” Governor Koba Gvenetadze said in an interview. Consumer prices in Georgia were up 2.9 percent in January in month-on-month terms after rising by 1.0 percent in December. Annual inflation in January was 3.9 percent, up from 1.8 percent in December.
The central bank, which cut the refinancing rate several times last year to combat low inflation, raised it to 6.75 percent from 6.5 percent on Jan. 25 following a pick-up in price growth. Gvenetadze said inflationary expectations rose amid strengthening of the U.S. dollar, depreciation of the Turkish lira as well as higher taxes, particularly excise duties on tobacco, cars and oil products imposed from Jan. 1. Turkey is one of Georgia’s main trade partners.
Gvenetadze said the central bank would be raising borrowing costs gradually, but would then return to monetary policy easing. “There will be a moderate increase in the refinancing rate, but in the medium term it will gradually return to its neutral rate, which at this point is 5.5 percent,” Gvenetadze said. He said that the central bank would avoid sharp policy tightening in order not to affect economic growth. “We think that economic growth will be close to 4 percent this year (up from 2.2 percent in 2016) and the current account deficit will also be better,” Gvenetadze said. Georgia’s trade deficit rose 40 percent year-on-year to $7.7 billion last year with exports declining 4 percent to $2.1 billion and imports rising 27 percent to $9.85 billion. Gvenetadze said the level of dollarisation, which rose to 70 percent of loans and deposits from 60 percent in 2016, might be slightly reduced this year helped by the government’s conversion programme.
The government initiated a social programme for borrowers, who had been the most affected by lari depreciation. It covers 27,000 loans worth $400 million. “De-dollarisation is a process, which will take a long period of time … But we may see some reduction this year,” he said. Gvenetadze said the central bank would intervene on the market only if needed and expected the bank’s reserves to be at an “adequate level”, covering at least three months import, by the end of this year. Georgia’s total foreign exchange reserves rose to $2.797 billion as of Feb. 1 from $2.757 billion a month earlier and from $2.448 billion a year ago. The central bank has sold $280 million on the foreign exchange market to support the lari currency and bought $278.35 million last year.
