The Business Association of Georgia (BAG) has expressed its approval of the recent decision by the National Bank of Georgia (NBG) to reduce the monetary policy rate by 0.5 percent. The BAG believes that this move will help the business sector recover from the economic challenges caused by the pandemic and stimulate investment and consumption.
NBG’s Decision Based on Inflation Trends
The NBG announced on February 3, 2024, that it had lowered the monetary policy rate from 8.5 percent to 8 percent, following the reduced rate of inflation in the recent period. According to the NBG, the annual inflation rate in January 2024 was 3.9 percent, which is below the target level of 6 percent. The NBG expects the inflation rate to gradually decline and reach the target level by the end of the year.
The NBG also stated that the decision was based on the macroeconomic forecasts and the external and domestic factors affecting the economy. The NBG noted that the economic activity in Georgia had improved in the fourth quarter of 2023, but it was still below the pre-pandemic level. The NBG also highlighted the positive impact of the vaccination campaign and the fiscal stimulus measures on the economic recovery.
BAG’s Reaction to the Interest Rates Cut
The BAG, which represents the interests of more than 100 leading companies in Georgia, welcomed the NBG’s decision and said that it was fully consistent with the inflation trends and the economic situation in the country. The BAG emphasized that the interest rates reduction was important for the business sector, as it would lower the cost of borrowing and increase the availability of credit for entrepreneurs and consumers.
The BAG also expressed its hope that the NBG would continue to monitor the inflation dynamics and the economic developments and adjust the monetary policy accordingly. The BAG stated that it was ready to cooperate with the NBG and other relevant institutions to support the economic growth and stability in Georgia.
Implications of the Interest Rates Reduction for the Economy
The interest rates reduction by the NBG is expected to have a positive effect on the economy, as it will stimulate the demand for loans and the spending power of the households and businesses. According to the NBG, the credit portfolio of the commercial banks increased by 15.9 percent year-on-year in December 2023, reaching 39.9 billion GEL (about 15.2 billion USD). The NBG also reported that the deposits of the commercial banks increased by 19.7 percent year-on-year in December 2023, reaching 42.8 billion GEL (about 16.3 billion USD).
The interest rates reduction by the NBG is also likely to boost the confidence of the investors and the consumers, as it signals the improvement of the economic outlook and the recovery of the financial sector. The NBG stated that the financial sector remained resilient and profitable in 2023, despite the challenges posed by the pandemic. The NBG also noted that the banking sector maintained high levels of liquidity and capital adequacy, and that the non-performing loans ratio decreased to 2.4 percent in December 2023.
The interest rates reduction by the NBG is also expected to have a positive impact on the exchange rate of the Georgian Lari (GEL), which has been depreciating against the US Dollar (USD) and the Euro (EUR) in the past year. According to the NBG, the exchange rate of the GEL was influenced by the external shocks, the pandemic-related uncertainty, and the increased demand for foreign currency. The NBG stated that it intervened in the foreign exchange market several times in 2023 to smooth the excessive fluctuations of the GEL and to maintain the adequate level of international reserves. The NBG also said that it would continue to use all the available instruments to ensure the price stability and the exchange rate stability in the country.
