National Bank of Georgia (NBG) said on June 16, that it had increased its benchmark rate from 5% to 6.25% in an attempt to fight inflation.

The central bank had kept the refinancing rate unchanged at 5% since late November, 2009.

Annual consumer prices increased 4% year-on-year in May, NBG said in a statement after a meeting of the bank’s monetary policy committee.

"According to current forecasts, in mid-term period if the policy is not changed, consumer price growth may exceed 6%,” it said.

NBG also said that annual growth in broad money (M3) indicator was over 40% in June, triggered by “economy stimulus” projects and increase in loans starting from this year.

“When such growth in broad money is not in line with economic growth rate, a risk of inflation emerges for a mid-term period,” the bank said, adding that similar to previous months, the trade deficit has continued to deepen in May.

NBG said that deepening trade deficit, lower than expected investments in the first half of 2010 and appreciation of U.S. dollar on the world market triggered the Georgian national currency, Lari, depreciation against USD. Lari depreciated vis-à-vis the USD from GEL 1.78 earlier this month to GEL 1.88 as of June 17. Almost similar exchange rate (GEL 1.875) last time was in September, 2004.
 
“In the view of these factors, the National Bank’s monetary policy committee deemed its reasonable to toughen policy in order to keep forecasted inflation rate within the targeted level in a mid-term period,” it said.