Natia Turnava: “We have lowered the refinancing rate from 11% to 8% over the past year.”
Verdict: FactCheck concludes that Natia Turnava’s statement is TRUE.
The National Bank of Georgia (NBG) utilises several mechanisms to control inflation, including adjustments to the refinancing rate. Commercial banks typically increase the interest rate on loans when the refinancing rate increases, making borrowing more expensive and leading to a reduction in loan demand. Consequently, this decrease reduces the overall money supply growth rate. High interest rates still pose challenges despite lower inflation as making loans more costly decreases economic activity. Therefore, central banks try to find a golden mean to achieve both goals – controlling inflation and maintaining economic activity.
The refinancing rate has fluctuated over the years, reaching the maximum of 12% in 2008 and the minimum of 3.75% in 2013. The rate amounted to 10.5% prior to Russia’s full-scale invasion of Ukraine in February 2022, increasing to 11% in March of the same year and maintaining this rate for the next year. The NBG began easing its monetary policy in May 2023 and decreased the rate to 8% in May 2024.
The refinancing rate decreased from 11% to 8% from May 2023 to May 2024, representing a three percentage-point decrease. Hence, FactCheck concludes that Natia Turnava’s statement is TRUE.
Analysis
During a briefing following the Monetary Policy Committee meeting on 30 July, the Acting Governor of the National Bank of Georgia (NBG), Natia Turnava stated: “We have implemented a gradual monetary easing policy over time, managing to reduce the refinancing rate from its highest mark of 11% to 8%.”
Ensuring price stability is one of the key objectives of the NBG as outlined in Article 3. The financial regulatory mechanism employs several instruments to achieve the aforementioned aim, including adjustments to the refinancing rate.
The NBG grants loans to commercial banks in the national currency which these banks then use to issue loans to individuals at higher rates. Over 176,000 borrowers had loans with variable interest rates as of 1 July 2024. Most of these rates are linked to the refinancing rate set by the NBG with some also tied to the Tbilisi Interbank Rate – TIBR which is either identical to or very close to the refinancing rate.
The cost of lending becomes more expensive when the refinancing rate increases and vice versa. If the commercial bank adds a margin of three percentage points to the refinancing rate of 8%, the interest rate for a loan to a citizen would constitute 11%. Additionally, if the refinancing rate was 12%, the interest rate would amount to 15% with the same margin.
The demand on a product typically decreases when its price increases and the demand generally increases when the price decreases. This principle of supply and demand also applies to bank loans. The lower the interest rate is on borrowing, the more people will take out loans.
The NBG attempts to reduce borrowing in the economy to decrease the money supply growth rate which in turn impacts inflation. Money supply is one of the numerous factors that affect inflation.
Whilst the increase in lending can stimulate the economy by encouraging spending on apartments, cars and household appliances, fostering home improvements and establishing new businesses, this boost in consumer prices decreases savings and negatively impacts individuals whose nominal incomes do not increase parallel with inflation. Thus, the NBG aims to find a golden mean balance in an attempt to achieve both goals – high economic growth rate and low inflation.
The refinancing rate amounted to 10% in January 2008, then increasing to 12% in April of the same year and maintaining the same level for four months. The refinancing rate of 12% remains the peak on record to this day. The refinancing rate was at a historically low mark of 3.75% from 15 August 2013 to 13 February 2014. The rate increased slightly to 4% later in 2014 and surged to 8% by the following year.
The refinancing rate once again reached a double-digit percentage in August 2021, after a 13-year period, constituting 11% from 30 March 2022 to 29 March 2023. The NBG began to gradually ease its monetary policy. The regulatory mechanism reduced the rate by 0.25 to 0.5 of a percentage point over time, bringing it down to 8% by May 2024.
The President of the NBG is responsible to make concluding decisions regarding the refinancing rate, largely based on recommendations by the Monetary Policy Committee. The Committee consists of 14 members, including the Governor, three Vice Governors and heads of relevant departments and divisions. Whilst the Committee typically meets twice a quarter, extraordinary meetings may also be held.
Graph 1: Monetary Policy (Refinancing) Rate
Source: National Bank of Georgia
High inflation rates were generally accompanied by high refinancing rates from 2008 to 2024. Inflation amounted to 10% in 2008, later dropping to 1.7% in 2009 and then increasing to double-digit figures in 2021 and 2022 (whilst the average annual inflation rate constituted 9.6% in 2021, it reached 13.9% in November-December of the same year). Notably, the exception was 2023 when whilst inflation fell to 2.5%, the refinancing rate remained at 10%. The NBG justified its conservative approach by citing certain ongoing risks. A press release dated 30 July attributed inflationary pressures on imported products to global economic uncertainty, fluctuations in global oil and food prices, increased transportation costs from China and stronger-than-expected domestic economic activity.
Natia Turnava explains that the ‘neutral rate’ is 7% and the NBG aims to reach this target gradually. If the rate is reduced to 7%, it will mark the lowest level since September 2019.
Given that the refinancing rate decreased from 11% to 8% from May 2023 to May 2024, representing a three percentage-point decrease, FactCheck concludes that Natia Turnava’s statement is TRUE.
