Galt & Taggart: Interest rates are falling in the Caucasus countries

By 2024, a continuation of the reduction of the monetary policy rate is expected in the Caucasus countries, which, first of all, will have a positive impact on investment activity in 2024 and, accordingly, on economic growth - the Bank of Georgia reports on this.

According to their own reports, according to the forecast of Galt & Taggart, the reduction of the monetary policy rate in Georgia will continue and by the end of 2024, it is expected to decrease by 100 basis points to 8.5%.

"In 2021-2022, many countries of the world faced the challenge of inflation. The reasons for the increase in prices were various, among which it is worth noting the increase in transportation costs due to the disruption of supply chains, the increase in the accumulated demand after the lifting of the restrictions of the Covid pandemic, the increase in the prices of oil products and food due to the war between Russia and Ukraine from 2022, etc.

Due to the alarming trends of inflation, the central banks of developed and developing countries started to increase interest rates. For example, the US Federal Reserve (Fed) raised the interest rate from 0.25% at the beginning of 2022 to 5.5% at the end of 2023, and the European Central Bank increased the interest rate from 0.0% to 4.5% in the same period.

Inflation has slowed globally in 2023. However, in developed countries it still remains above the target level of 2.0%. Inflation is expected to continue to decline in 2024 and central banks will move to ease monetary policy in response. For example, the Fed's latest forecast calls for an interest rate cut of 100 basis points to 4.5%, and the European Central Bank forecasts a 75 basis point cut to 3.75% by the end of 2024.

The central banks of the Caucasus countries started increasing interest rates from 2020. It should be noted that the Central Bank of Armenia increased the interest rate the most, which was in progress for 2 years, and in the shortest period (within 1 year) the rate increase was carried out in Georgia, namely:The interest rate of the National Bank of Georgia gradually increased by 300 basis points from March 2021 and reached its peak rate of 11.0% in March 2022.

The interest rate of the Central Bank of Armenia has gradually increased by 550 basis points since December 2020, reaching a peak rate of 10.75% in December 2022.

The Central Bank of Azerbaijan started raising the interest rate from September 2021 and gradually increased it by 250 basis points to a peak rate of 9.0% in May 2023.

In 2023, all three countries of the Caucasus moved to monetary policy easing as inflation in these countries declined rapidly. It should be noted that the interest rate in Georgia and Armenia decreased to the same extent, and in Azerbaijan to a lesser extent, because the reduction of inflation started later in this country, namely:Annual inflation in Georgia has been below the National Bank's target of 3.0% since April 2023.

Accordingly, the National Bank started softening the monetary policy from May and gradually reduced the interest rate by 150 basis points to 9.5% by the end of the year.The decrease in inflation in Armenia was sharp, deflation is fixed from the second half of 2023 (ie, consumer prices decreased compared to the comparable period of the previous year). In response, the Central Bank of Armenia started reducing the interest rate from June this year and gradually reduced it by 150 basis points to 9.25% by the end of 2023.

As for Azerbaijan, the annual inflation here remained above 4.0% until October 2023, and from October it fell below the mentioned level. In response, the Central Bank of Azerbaijan did not hesitate and started easing monetary policy from November and gradually reduced the interest rate by 100 basis points to 8.0% in December 2023.

By 2024, a continuation of monetary policy rate reduction is expected in the Caucasus countries, which will primarily have a positive impact on investment activity in 2024 and, accordingly, on economic growth.

According to Galt & Taggart's forecast, the reduction of the monetary policy rate in Georgia will continue and by the end of 2024 it is expected to decrease by 100 basis points to 8.5%. "Most likely, the same size, 100 basis points reduction may also take place in Armenia and Azerbaijan," the information said.

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