Armenia and Georgia raise policy rates

The Armenian and Georgian central banks raised their policy rates in the first week of August as higher prices abroad added to concerns over inflation.

The Central Bank of Armenia’s board increased the local refinancing rate by 50 basis points to 7% on August 3. On August 4, the National Bank of Georgia’s monetary policy committee raised its policy rate by 50bp to 10%, its highest level since 2008.

Both countries raised policy rates earlier this year. The NBG lifted rates from 8% to 8.5% in March and then to 9.5% at the end of April. The CBA has raised its rate by 250bp since June 2020, and August’s increase is the fifth in 2021.

In its explanation of the rate hike, the NBG cited higher prices for certain imported inputs, including oil. It also said domestic stimulus spending was pushing up prices. Year-on-year inflation in July was 11.9%, well above the target of 3%.

In a written response to Central Banking, the NBG said “increased commodity prices on food and energy at international market” constituted “the major contributor” to inflation. The central bank also cited the end of a subsidy programme for utility bills, which increased prices in that sector.

The NBG indicated that it expected inflation “to start moving towards the target” in the second quarter of 2022. It noted that many inflationary pressures were likely to be temporary. However, it vowed to “maintain monetary policy at a tightened stance to curb additional inflationary pressures, so that this does not lead to long-term inflation expectations becoming unanchored”.

The CBA also cited higher prices abroad and increased demand at home in its statement on the monetary policy decision. Headline inflation was 6.5% in June, whereas its target is 4%, plus or minus 1.5%. The central bank said it expected the inflation rate to “stabilise around the target” in the second half of 2022.

A spokesperson for the CBA tells Central Banking policy changes in recent years have helped keep expectations anchored. “The disinflationary policy to anchor inflation expectations after the 2014–2015 shock created a policy space for the CBA after the large shocks – inflation expectations remained anchored despite the inflation acceleration.”

The International Monetary Fund predicts that “end-of-period” inflation for 2021 will be 5% for Georgia and 3% for Armenia.

Georgia suffered a 6.1% decline in GDP in 2020, according to IMF estimates. The fund forecasts a partial recovery this year, with 3.5% growth. The NBG told Central Banking that it has revised its real GDP growth forecast up to 8.5% for the year.

Armenia suffered a bigger GDP decline of 7.1% and can expect only 1% growth this year, according to the IMF.

The country’s difficulties in 2020 went beyond Covid-19. It was engaged in a brief war with Azerbaijan over the long-disputed Nagorno-Karabakh region and surrounding territory. Armenia was forced to evacuate part of Nagorno-Karabakh and all the Azerbaijani territory it had occupied since the early 1990s.

The NBG’s next monetary policy meeting will take place on September 15. The CBA’s board will hold a monetary policy meeting next month.

Neighbours

Russia has also implemented several rate hikes in recent months. On July 23, the Bank of Russia imposed its fourth rate increase of 2021, a 100bp hike that brought the policy rate to 6.5%. Governor Elvira Nabiullina indicated inflationary pressure was likely to remain “steady”, rather than proving temporary.

Inflation in Russia reached 6.5% in June, above the central bank’s 4% target.

Russia was Armenia’s largest trading partner by far as of 2019, according to the World Bank. Georgia does 12% of its trade with Russia, and 14% with similarly inflation-stricken Turkey, according to the European Commission.

In its response to Central Banking, the NBG noted that high inflation in Turkey and Russia had an impact on Georgia. However, the central bank observed this was likely due to common factors affecting all three nations. Turkey and Russia “are facing same types of risks from the fast rebound in activity, global commodity price pressures [and] supply chain disruptions”, the NBG said.

The third former Soviet republic in the Caucasus, oil-rich Azerbaijan, has kept its rate steady at 6.25% since December 2020.

Correction: This article has been amended since publication to clarify that Armenia’s headline inflation was 6.5% in June, while 7.8% is the core inflation figure. Additionally, the central bank’s forecast horizon is 36 months; it expects inflation to stabilise around the target in the second half of 2022.