Georgia Cuts Interest Rates, Reserve Requirements

Georgia's central bank has cut its benchmark interest rate following an emergency meeting by 1 percentage point for the second month to ease a shortage of cash in the financial system.

The rate was reduced to 10 percent after a Wednesday meeting, the bank said on its web site Friday. The central bank also lowered the minimum reserve requirement for banks to 5 percent from 13 percent starting Oct. 2, the statement said.

"Bank activity has slowed significantly due to increased business risks and the ongoing liquidity deficit," the central bank said. Cutting the reserve requirement should "free up additional liquidity for banks and, on the other hand, increase the money multiplier."

The central bank on Aug. 20 also cut the key rate to promote growth and liquidity following fighting with Russia. Inflation accelerated to 12.8 percent in August, the fastest pace in two years, after the conflict disrupted supplies and forced tens of thousands of people to abandon their homes.

"Despite the recent military conflict, inflationary pressures have not intensified," the bank said. The increase in the inflation rate was because of "temporary supply bottlenecks."

The bank had raised its benchmark one-week certificate of deposit rate by a total of 5 percentage points since November in an effort to slow inflation. The inflation rate declined before the conflict, reaching 9.8 percent in July from 12.3 percent in March.

The Monetary Policy Committee will next meet Wednesday, the statement said.

The news comes as the International Monetary Fund is scheduled to consider a $750 million loan program for the country on Monday, according to the IMF's web site.

Approval of the 18-month loan is intended to help soften the recent blow to investor confidence.

Georgia depends on foreign capital to keep its economy growing. It has been enjoying an investment boom under President Mikheil Saakashvili's but has faced a liquidity crunch since the war.

The World Bank last week ranked Georgia 15th out of 181 countries in its annual "Doing Business" report, which looks at how business-friendly economies are. Private flows into Georgia were running at 23 percent of gross domestic product in 2007, as foreigners plowed capital into construction, tourism, telecoms and transport infrastructure.

Bloomberg, Reuters