TBILISI, April 27 (The Conway Bulletin) — Georgia’s Central Bank cut its key interest rate for the first time in three years, performing a policy U-turn designed to boost its flagging economy.
It cut its key refinancing rate by 50 basis points to 7.5%, having steadily raised it from 4% throughout 2015. It said this was the first step towards a rate of around 5 or 6%.
“The Monetary Policy Committee considers it necessary to start phasing out the tight monetary policy, which means the gradual reduction of the refinancing rate down to the neutral level in the medium-term,” the Central Bank said in a statement.
“The rate of further monetary policy softening will depend on the revised inflation forecasts.”
In March, annualised inflation fell to 4.1% from 5.6% in February.
The Central Bank also dropped the lari-denominated minimum capital requirements for its commercial banks from 10% to 7% and increased the US dollar-denominated requirements.
It did this to try to push more lari into circulation and to take the US dollar off the market.
Alongside the less-than-rosy economic news, the Central Bank said that there had been signs of improved economic activity, especially in construction, but that high interest rates and other issues were a brake on potential growth.
“Another factor keeping the economic growth low is the negative impact of the economic situation in Georgia’s trade partners, reflected in the decrease of remittances and weakening of external demand,” it said.
Russia and Greece have traditionally been Georgia’s main source of remittances. Russia is currently in a recession linked to low global oil prices and Western imposed sanctions. Greece’s economy remains in recovery-mode after the impact of the 2008/9 Global Financial Crisis.
Like inflation, GDP growth has also been sluggish. The Statistics Committee said GDP grew by 2.3% in Q1, one percentage point slower than the expectations. The Central Bank expects 3% GDP growth in 2016.
— This story was first published in issue 278 of The Conway Bulletin newspaper. The Conway Bulletin reports weekly on Central Asia and the South Caucasus. For more info, click here and for access to our free daily newswires, click here