The National Bank of Georgia (NBG, the central bank) lowered the refinancing rate from 12% in mid-2008 to 5% in November, and kept it at that level until June 2010 in a bid to stimulate the economy. Since then, the NBG has raised the refinancing rate by a cumulative 300 basis points, to 8% in February 2011. The central bank has said that its decision to raise the refinancing rate was motivated by concerns over a resurgence in inflationary pressures, which have been driven by an increase in global food prices. Faster than expected GDP growth in the first half of 2010 and a decision to support the lari have also been factors behind the rate increase.

As the stability of the economy improves, the NBG will continue to gradually tighten policy, and to resume working towards setting up an inflation-targeting regime. Issuance of certificates of deposit (CDs) and open-market operations should eventually facilitate this process. Nevertheless, the development of liquid domestic securities markets, which is essential for the smooth conduct of monetary policy, will take time, as investor risk appetite towards Georgian assets will remain weak in 2011 owing to post-conflict concerns, before gradually increasing through 2012. Tension will remain between the competing policy objectives of improving external competitiveness and achieving domestic price stability.