TBILISI (Reuters) - Georgia’s central bank plans to further tighten monetary policy if inflation caused by the fall of its currency persists, the bank’s governor said.
Georgia is eager to stabilize its currency, the lari, after it hit a record low last month on the backdrop of a spat with Russia.
Anti-Russian protests in the ex-Soviet republic earlier this year prompted Moscow to suspended flights to the country and tighten imports of Georgian wine that supports the economy.
Faced with additional challenges, Georgia expects annual inflation to exceed the target level of 3% and reach around 5% by the end of this year, central bank chief Koba Gvenetadze told Reuters in an interview.
“We will tighten (monetary) policy until we see that the impact of the exchange rate on inflation eases,” Gvenetadze said.
The national currency hit an all-time low in August to 2.9718 on the dollar GEL=, prompting the central bank to raise it key refinancing rate to 7% from 6.5% this year after annual inflation exceeded its target.
Gvenetadze added that economic growth in 2019 was expected to be around 4.5% and that the current account deficit this year was seen declining to 4-5% from 7.7% in 2018.
Gvenetadze said the uptick in inflation was mainly caused by an increase in excise taxes and by the depreciation of the national currency against the U.S. dollar, which among other reasons was caused by political instability in the country.
Gvenetadze said inflation could return to the 3% target in the medium-term if the central bank took appropriate measures.
He added that the bank could consider a rate hike at its next monetary policy meeting on Oct 24 or ever earlier if it decides to call an extraordinary meeting.
After Russia suspended flights to the country, revenues from tourism declined 13.3% year-on-year in July and 10.6% in August.
All the same, the economy managed to expanded 5.1% year-on-year in the first seven months of 2019, down from 5.5% growth in the same period of 2018.
“I would not exclude that Georgian economy ... will be able to absorb this shock and go through this quite well,” Gvenetadze said.
Moody’s rating agency affirmed Georgia’s BA2 rating on Thursday with a stable outlook.
Reporting by Margarita Antidze; editing by Gabrielle Tétrault-Farber & Shri Navaratnam