Since 2009, the monetary policy of the National Bank of Georgia has relied on inflation targeting. This regime implies the announcement of an inflation target that should be maintained in the medium term. The target inflation rate is set by the National Bank of Georgia and afterwards approved by the Parliament of Georgia.
The inflation target for 2018-2020 is set at 3%.
Why Inflation Targeting?
The inflation targeting regime is a relatively new framework that from 90s onwards has been an effective tool to achieve price stability. In 1990 the Central Bank of New Zealand was the first central bank to introduce this framework.
In an inflation targeting regime the announced of quantitative inflation target represents the optimal rate of inflation for the medium term. One of the main factors that determines inflation is inflation expectations. Thus, the main goal of the National Bank of Georgia is to form the inflation expectations. Moreover, one of the advantages of inflation targeting framework is its transparency and the ease of communication to society. The announced inflation target enables the main objective of the NBG to be precisely defined and expectations about the possible directions of monetary policy to be formed.
Before adopting inflation targeting as a monetary policy framework, the central bank relied on monetary targeting, which intended to ensure the desired growth rate of monetary aggregates. In monetary targeting, the National Bank of Georgia used the money supply as an intermediary link for controlling inflation. During monetary targeting, unlike inflation targeting, a stable relationship between money supply and inflation plays a crucial role. However, in practice, money demand is unstable (especially in times of the rapid development of new payment forms and banking systems). This fact changes the relationship between monetary aggregates and inflation and creates the necessity to frequently revise the intermediate target. It is, therefore, inefficient to use money supply as an intermediate target in times of active monetary policy.