4% drop in inflation pressure in June enabled Georgian Central Bank to make its monetary policy more easygoing and forecast the inflation rate decrease below the 8% target level at the beginning of next year. Economic analysts thumb up the central bank’s decision though they find it impossible to hit the inflation target rate this year.

The National Bank of Georgia (NBG) continues monetary policy easing-up that started last month; it lowered its Main Policy Rate (refinancing rate) by 25 basic points to 7.5% on August 17, 2011 for the second time. According to the NBG, in the recent months inflation showed faster decrease than it was expected and can possibly decrease even more. Presumably, by the end of this year the inflation will fall below the target level [8%] and remain low in the first half of the next year. However, experts are in a skeptical mood.

Consumer Price Index decreased by 1.5% in July, 2011 compared to the previous month. The annual inflation rate stands at 8.5%. The share of food remains high in the annual rate of inflation and amounts to 6.7%. The core inflation net of food and energy decreased further to 0.03% in the month of June. The inflation in service sector is also low and stands at 1.2%.

As soon as the inflation pressure eased in Georgia from the May’s 14.3% to 10% in June the NBG was found apt to undertake more liberal monetary policy. It slightly lowered the refinancing rate from 8% to 7.75% on July 20, 2011 [for the first time during the past six months] and almost halved requirements for commercial banks on financial reserves in order to boost the sector to attract as well as disburse long-term credits.

According to the NBG, the reserve requirements on long-term borrowings in national and foreign currency [increased to 10% and 15% respectively early this year after inflation pressure got acuter] exempts over one-year borrowings in national currency and over 2-year borrowings in foreign currency. Moreover the reserve requirement reduced to 5 % on borrowings in foreign currency with maturity from 1 to 2 years. As an aftermath Georgian commercial banks are expected to have about extra GEL 100 million financial resources and supposed to become more active in business crediting.

The Consumer Price Index decrease by 4 % in June, the downwardly going oil price tendency at international market as well as removal of the Russian and Ukrainian bans on wheat export made the NBG to forecast that the inflation can possibly decrease below the target level (8%) at the beginning of next year.

The influence of exogenous factors, that kept inflation high during the year, is gradually fading away. Consequently, a sharp decrease in inflation is expected in the third quarter, the NBG predicted.

Meantime European Central Bank made stronger monetary policy and warned of higher inflation risks looming in prospect in July irrespective the international market trends cutting prices on oil and food product. The rate did not change in August. Based on simple logic Georgia that by more than 80% depends on imported product [including 80% of wheat and almost 100% of fuel] has less ground to be optimistic on account of the upcoming inflation pressure than the EU.

The NBG explained to Georgian Journal that exogenic factors influencing inflation differ in EU and Georgia. The latter suffered seriously last year due to restriction on Russian, Ukrainian and Kazakh wheat export making key bulk suppliers to Georgia. Georgia had to replace them by farther markets that affected the yet increased wheat prices by bigger transportation and logistics costs. Moreover, the EU has milder and Georgia stronger monetary policy before that changed now as far as the EU could not bottom out economic recession in 2010 while Georgia had a significant economic growth.

Georgian economic analysts appear skeptical on Georgian statistics. They doubt that consumer prices reduced by 4% in June as far as prices on essential food like bread, butter, sugar as well as fuel did not decrease in fact. Moreover, increased prices on transportation [almost doubled recently] and big communal expenses making about 10-15% of household incomes put bigger question marks over the authenticity of official figures. The single thing that cheapened is fruit and vegetables due to seasonal effect but sugar prices increased on the other hand thanks to similar effect.

According to Levan Kalandadze, an economic analyst, price slumps at international market do not reflect in Georgia as far as inflation expectation that is one of the most important factors of price-making policy, is high here and importers/businessmen hate cutting prices down on products. He does not expect the inflation pressure to fall to the targeted 8% this year. Neither does Nodar Khaduri, another economic analyst. Both approve the NBG policy as reasonable but find the one-digit inflation scarcely available this year.

Source: www.georgianjournal.ge