The National Bank of Georgia has kept interest rates on hold at 11% as inflation appears to have peaked but remains relatively high on a Russian immigration boom.
Georgia’s economy is enjoying one of the fastest growth rates in the world as many countries head into recession, and it has one of the few emerging market currencies – the lari (GEL) – that is appreciating against a strong US dollar.
What are the prospects for them Inflation rate in Georgia to 2023?
In this article, we look at inflation drivers and some of the latest inflation forecasts for Georgia.
How does Georgia measure inflation?
What is inflation? A country’s inflation rate refers to the rate at which the prices of goods and services are increasing over time, eroding the purchasing power of consumers. In most countries, central banks set inflation targets to ensure price stability.
Inflation rises when consumer and business demand exceeds supply, driving up the prices suppliers charge for goods and services. Higher costs for inputs such as raw materials and components can also lead to inflation as suppliers charge customers higher prices to recover these costs. Exchange rates have an impact as they affect how much money a country pays to import goods and how much it receives from exports.
How is inflation measured? National statistical offices calculate inflation by comparing the value of a basket of goods and services in a price index with the value of the index over previous months and years.
There are different types of inflation index such as Consumer Price Index (CPI), Retail Price Index (RPI), Personal Consumption Expenditure (PCE) or Producer Price Index (PPI).
Headline inflation refers to overall data, while core inflation excludes volatile prices such as food and energy.
Inflation data helps inform a country’s monetary and fiscal policies and provides information to the public. In Georgia, inflation rate data is collected and published by the National Statistical Office of Georgia.
Georgia’s core inflation is calculated by excluding food and non-alcoholic beverages, energy, regulated tariffs and specific transport tariffs from the basket of goods. The Bureau of Statistics also calculates core inflation excluding tobacco.
Fallout between Russia and Ukraine fuels inflation in Georgia
According to the history of inflation rate in Georgia from economic data provider TradeEconomicsThe country’s inflation rate has averaged 7.34% since 1996, falling from an all-time high of 59.31% in April 1996 to a record low of -3.30% in May 2012, before gradually trending upwards.
The inflation rate in Georgia rose in 2021 from an annual rate of 2.4% in late 2020 to 13.9% in late 2021, as currency depreciation and a rebound in commodity prices from Covid-19 lows pushed up the cost of imports.
Source: National Statistics Office of Georgia
Inflation in 2022 fell to 11.8% in March and then rose again to 13.3% in May as the Russia-Ukraine conflict pushed up prices. Since then, however, the rate has trended downwards and stood at 10.6% in October.
The National Bank of Georgia raised its interest rate by 50 basis points to 11% in March – the highest level since the 2008 financial crisis, after raising interest rates by 50 points in December 2021.
The bank has since kept the rate at 11% as it expects the inflation rate to have peaked and will remain relatively high until it starts falling in 2023.
The development of the inflation rate in Georgia has been influenced by the war between Russia and Ukraine, which has seen more than 112,000 Russians – many of them technicians – enter the country since the invasion began in March. This has led to erratic capital inflows, with more than $10 billion pouring into Georgia from Russia from April to September. While many emerging markets have sold their foreign exchange reserves to protect their currencies from the impact of a strong US dollar and capital flight in response to geopolitical uncertainties, the surge in inflows has boosted Georgia’s foreign exchange reserves.
The exchange rate of the US dollar to the Georgian lari rose to 3.40 in March from 3.09 earlier this year to 3.40 in March in initial reaction to the invasion of Ukraine, but has since been on a downtrend, trading at 2 on 18 November 2022, 72
The lari has also appreciated against the euro, offsetting some of the imported price inflation from high energy and food prices. However, a strong currency weighs on export demand and values.
The arrival of more than 100,000 immigrants in a country of 3.7 million people has caused a housing crisis and contributed to higher consumer prices. It has also sparked an economic boom, exceeding expectations from analysts who had expected the war to weigh on Georgia’s economy.
The World Bank revised down its gross domestic product (GDP) forecast for Georgia to 2.5% in April from 5.5%, but the economy is on track to grow more than 10% this year.
On November 7, the International Monetary Fund (IMF) entered into a staff agreement with Georgia for approximately $38 million in funding.
“The Georgian economy has performed strongly in 2022 as the adverse effects of the war in Ukraine have so far generally had less of an impact than previously anticipated. Buoyant tourism receipts, a war-triggered surge in immigration and financial inflows, and a rise in transit trade through Georgia follow a robust recovery from the pandemic and have boosted growth and tax receipts, strengthened the current account and the lari, and supported the accumulation of foreign exchange reserves,” said the IMF.
“Credit growth has slowed but inflation remains high, reflecting still high commodity prices and strong domestic demand. Swift and proportionate NBG measures have helped limit the impact of the war on the financial sector, including requiring banks to comply with relevant sanctions.”
Following its most recent Monetary Policy Committee (MPC) meeting on Oct. 26, the National Bank of Georgia said:
“The war between Russia and Ukraine and the associated sanctions against Russia have significantly increased migration flows to Georgia and boosted demand. Average real GDP growth in the first eight months of 2022 was 10.3 percent. Accordingly, the forecast for economic growth in 2022 was revised upwards to 10 percent.
The average annual level of economic activity in 2022 is expected to exceed its potential level. As a result, demand-side inflation risks have increased, although this is partially offset by the strengthening of the GEL exchange rate as a result of FX inflows.”
The monetary tightening by the European Central Bank (ECB) and the US Federal Reserve (Fed) is expected to have an additional monetary tightening effect on foreign currency lending in Georgia. And as the country’s budget deficit shrinks, demand-side inflationary pressures should be neutralized, helping inflation slow down, the bank said.
What will be the inflation rate in Georgia in 2023? How low can it fall?
Inflation outlook for Georgia
The National Bank of Georgia forecasts that inflation will remain elevated through the fourth quarter of 2023 and then return to the 3% range. The rate could fall to around 2.96% by the fourth quarter of 2024 and remain around 3% in 2025.
“All things being equal, inflation will remain high until the end of the year but will continue to decline gradually and approach the target level in the second half of 2023. Taking into account the existing inflationary risks, tight monetary policy will be maintained and its normalization will gradually begin only when a clear trend of declining inflation is observed. On the other hand, if inflation expectations rise and/or additional price pressures arise on the demand side, further monetary tightening or maintaining the current accommodative stance for an extended period may be required,” the bank said.
The next MPC meeting will be held on December 21, 2022 and will decide whether to keep or adjust interest rates.
Source: National Bank of Georgia
The IMF also assumes that Georgia’s expected inflation rate will fall by 2024:
“Growth is now forecast at 10 percent in 2022, while annual inflation is expected to end the year at 10½ percent. Growth and inflation are expected to slow in 2023 as external inflows slow and global economic and financial conditions worsen, with fiscal deficits and a sufficiently tightening monetary stance.
In the medium term, growth is projected to converge towards its potential rate of around 5 percent, supported by infrastructure investment and structural reforms to boost productivity. Inflation should fall to the NBG’s target level of 3 percent in 2024.”
At the time of writing this article, the inflation rate of Georgia was forecast TradeEconomics forecasts, based on its econometric models, a slightly higher inflation trend for a longer period of around 6% in 2023 and 4.50% in 2024.
If you are looking for an inflation forecast for Georgia to inform your trading decisions, remember that economic and geopolitical forecasts can cause real interest rates to differ from forecasts.
We encourage you to always do your own research. View the latest market trends, news, technical and fundamental analysis and expert opinion before making an investment decision.
Remember that past performance is no guarantee of future returns. And never invest money that you cannot afford to lose.
frequently asked Questions
What is the current inflation rate in Georgia?
Georgia’s annual inflation rate was 10.6% in October, compared with 11.5% in September and a peak of 13.9% in December 2021.
Has inflation gone up or down in Georgia?
Inflation in Georgia, while still relatively high, has been declining since May 2022.
Why is inflation so high right now?
Inflation has skyrocketed since 2021 due to a combination of high commodity prices, strong economic growth and rising demand from immigrants from Russia to Georgia since the Russian invasion of Ukraine.
Rate this article