National Bank of Georgia hikes refi rate to 8.25% amid rising inflation, Middle Eastern crisis

TBILISI. May 6 (Interfax) - The National Bank of Georgia's Monetary Policy Committee has hiked the monetary policy or refinancing rate from 8% to 8.25% per annum, the NBG said in a press release

"This decision is aimed at keeping inflation expectations firmly anchored at the target. The moderate tightening of monetary policy, in turn, reduces the risks of second-round effects and aims to ensure that, once the supply-side shock dissipates, inflation converges swiftly to the 3% target," the NBG said.

The escalation of geopolitical situation in the Middle East and the prolonged substantial disruptions to shipping through the Strait of Hormuz have created another supply-side driven inflationary shock to the global economy, the NBG said. "The sharp increase in the prices of raw energy resources on international markets has already been reflected in rising global inflation. The direct effect of the aforementioned increase in oil prices has already been reflected in fuel prices in the Georgian market. As a result of the combined direct and indirect effects of these supply shocks, headline inflation deviated from the 3% target in April, reaching 5.9% [up from 4.3% in March]," it said.

The NBG's updated central scenario assumes that the ongoing war in the Middle East will end in the second quarter. However, this assumption is conditional and subject to high uncertainty. Even if the geopolitical situation indeed de-escalate during this period, the pace of recovery in global supply capacity is subject to additional uncertainty. Consequently, high inflationary risks are more pronounced. There is also a possibility that the geopolitical situation will de-escalate more quickly, mitigating pro-inflationary factors.

As a result, the NBG considered it optimal to increase the monetary policy rate by 0.25 pp to 8.25%. If inflationary shocks stemming from geopolitical tensions intensify, the NBG will continue to moderately increase the monetary policy rate. Once the inflationary shock dissipates, the NBG will begin a gradual normalization of the policy stance.

The Monetary Policy Committee will hold its next meeting on June 17.

At its last meeting on March 25 the NBG decided to hold the policy rate at the 8% in effect since June 19, 2024, for second time since the start of this year.