Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 13 December 2019
Today, the Board of Directors has decided to cut the key rate by 25 bp down to 6.25% per annum.
We will consider the necessity of further key rate reduction in the first half of 2020.
Let me dwell on the main factors behind the decision.
First. Annual inflation continues to decline faster than we expected. Our revised inflation forecast for the end of this year is 2.9–3.2%. Meanwhile, average 2019 inflation will stand at 4.5%, which reflects the high price growth rate in late 2018 and the first months of 2019.
This significant slowdown in inflation in the second half of the year was caused by a joint action of a number of disinflationary factors, both temporary and more persistent. These factors include an increased supply of individual food products due to a bumper harvest. Also, price growth of imported goods is still limited due to the ruble appreciation and inflation deceleration amongst Russia’s trading partners. At the same time, moderate demand, both external and internal, is a more persistent factor. The proportion of temporary and persistent factors has yet to be estimated.
Most indicators that we analyse reflect low inflationary pressure. Annual core inflation is declining at the same rate as the headline consumer price index. Both indicators were registered at 3.5% in November. Seasonally adjusted monthly price growth has been around 0.2% since June.For food products, this indicator came in even lower in October and November. If we transform these monthly indicators into annualised form, the result will be lower than 4%.
However, looking at the key product groups, while annual food and non-food price growth keeps falling, services prices increased slightly faster in November with their growth rate reaching 3.9%. This was mainly owing to the market services segment, which could be an early sign of a potential revival of demand. Survey results also indicate an improvement in consumer sentiment.
As to the next year, our inflation forecast for the first quarter is below 3%. This decrease will be temporary. It is in line with our expectations and is explained by the fact that the effect of the VAT rate increase will be factored out from the calculation of annual inflation. In the second half of the year, inflation will be returning to around 4%. This will be helped by the monetary policy easing that the Bank of Russia has implemented this year. I would like to reiterate that monetary policy measures influence the economy and inflation in a gradual manner. The accumulated effect of the earlier key rate decisions will manifest itself throughout 2020. Therefore, it may take some time to assess the necessity for a further key rate reduction.
Taking into account the key rate decisions and other assumptions of our baseline forecast, we expect inflation to range within 3.5–4.0% by the end of 2020. Moving forward, the monetary policy pursued will keep annual inflation close to 4%.
Second. Household inflation expectations decline but stay above the lows registered in April 2018. However, the perception of inflation by households is gradually changing. We see that inflation expectations are forming now at the level that is lower than the one observed amid comparable price dynamics in late 2017 – early 2018. This is largely associated with the recent trend for average inflation to be much lower than before. The inflation volatility range has also narrowed. However, inflation expectations remain sensitive to changing prices of individual goods and to one-off events. In our policy, we take into account the fact that we need more time to fully anchor inflation expectations.
Business price expectations decreased in the first half of the year and have remained generally stable during the last few months. Mid-term inflation expectations of analysts and professional market participants are close to 4%.
Third. Monetary conditions are easing and this process will continue mainly due to the earlier key rate decisions.
OFZ yields stay at their lowest levels for the last few years after the October key rate decision. Interest rates in the deposit and credit market are going down. I would like to specifically point out that the interest rate on housing mortgage loans extended in October fell to 9.4% vs 10.6% in May. At the same time, real deposit rates remain positive taking into account inflation forecast, which supports the attractiveness of savings.
Our estimates suggest that there is still a certain potential for a further decrease in loan interest rates. We will assess further adjustment of monetary conditions, in particular, gradual changes in interest rates in various market segments as well as monetary indicators. Their further effect on economic indicators and price dynamics. This is a lengthy and gradual process. Our further monetary policy decisions will depend on its development and consistency with our expectations.
The most important factor that we analysed today is the situation in the economy. We expect that GDP growth rates will be closer to the upper bound of our forecast range of 0.8–1.3%.
The Q3 results show that economic growth accelerated to 1.7%. Industrial output keeps growing. In October, after a prolonged slowdown, we saw an increase in annual retail sales growth. This was supported by an acceleration in real wage growth largely due to inflation slowdown amid relatively unchanged nominal wage growth.
Starting in September, we have observed a notable increase in budget spending on national projects. In the second half of the year, government investment started to support economic growth.
At the same time, we have yet to estimate the stability of higher economic growth rates. Demand remains contained in general. Various investment activity and business sentiment indicators show mixed dynamics. In particular, new (especially, export) order expectations in industry remain low. This reflects a slowdown in global economic growth, continuing global trade tensions and geopolitical risks. These are all restraining factors for our economy.
Regarding the three-year forecast horizon, our expectations here have not changed overall since October. We expect that the GDP growth rate will gradually increase to 1.5–2.0% in 2020 and to 2–3% in 2022. Successful implementation of national projects should provide the largest contribution to the increase in growth rates. This will support internal demand while external conditions remain a factor of uncertainty in the forecast.
As regards oil prices. Last week, the OPEC+ countries reached a deal to extend oil production cuts until the end of March 2020.As of now, we stick to a conservative assumption for oil prices in our forecast: their reduction to 55 US dollars per barrel in 2020 and to 50 US dollars per barrel in 2021 and further on. We will adjust this opinion depending on, among other factors, future changes in the OPEC+ agreements and global demand for energy commodities.
As to the balance of payments, we have slightly adjusted some indicators for this year, taking into account the actual data available. Let me remind you that the current account balance will gradually decrease over the forecast horizon remaining sustainably positive: approximately to 3% of GDP in 2020 and to 1–2% of GDP in 2021. This is associated with oil price trends and external demand. The financial account balance of the private sector will shrink to about 1% of GDP in 2020–2022.
As usual, making our decisions, we also factored in risks. We are currently talking a lot about disinflationary factors, and they do prevail for the moment. However, there are also proinflationary risks over the forecast horizon.
First, such risks are associated with external factors, which include the world economy and global financial markets.
Second, it is hard to exactly assess the extent to which the inflation slowdown in the food market is caused by temporary factors, the timing and the likelihood of the turnaround in their dynamics and the intensity of balancing changes in food prices given the current low base.
Third, as we have noted, the aggregate effect of five earlier key rate cuts will be gradual and its estimation will take time.
As for the fiscal policy, the situation seems more balanced in terms of its effect on inflation in 2020, given that budget spending, including into the national projects, will be distributed over time.
Let me remind you that the next policy meeting of the Board of Directors will also be a core one, same as today. This is associated with the changes in the schedule of the Board of Directors’ policy meetings. We are going to sum up the results of 2019 at our next meeting. We will then have detailed data on GDP for the third quarter, preliminary data on the balance of payments for the entire 2019, as well as current economic statistics for December and first data on inflation in January. We will adjust our mid-term forecast based on this information.
Winding up, I would like to get back to the signal of our future actions. We have said today that we will consider the necessity of a further key rate reduction in the first half of 2020. Noting that, after similar signals in the past, it was twice that we cut the key rate already at the next meeting, namely in October and today, and anticipating your clarifying questions, I would like to point out the following. This wording means that we still see room for a slight decrease in the key rate. But both in February and at the next meetings we will comprehensively assess the reasonableness and relevance of such a decision taking into account the entire range of new data that will be available by that time. Our signal does not imply that we will necessarily lower the key rate in February or in the first half of 2020. A further key rate cut will become possible only if our analysis confirms that this is needed to bring inflation back to the Bank of Russia’s 4% target.
Q&A for the Media
QUESTION from TASS Agency:
Ms Nabiullina, the Ministry of Finance has announced recently that, together with the Bank of Russia, it is looking into the reduction of deferred currency purchases. What is the Bank of Russia’s stance on this issue? Thank you.
ELVIRA NABIULLINA:
I admit that we are discussing, among other things, the investment of (the liquid portion of – editor’s note) the NWF funds in excess of 7% of GDP because the Ministry of Finance will be selling foreign currency during the same period. We have discussed this issue; however, in our view, an automatic netting or setoff between our deferred purchases and the Ministry of Finance’s expenditures is almost impossible.
The reason is that our deferred purchases are evenly distributed over time, and we announced the time horizon. The Ministry of Finance’s expenditures are most likely to be less even, and we have yet to see their time horizon.
This is the reason why it is hardly possible to introduce any form of netting, in our opinion.
QUESTION from TASS Agency:
Earlier notices said that the Central Bank was looking into the possible publication of the key rate forecast. Are such plans still in place? When might they be implemented? Thank you.
ELVIRA NABIULLINA:
We constantly discuss this issue. It really arises all the time. There are both advantages and drawbacks. The advantages are evident, and I will not dwell on all of them. Economic agents find such monetary policy more predictable.
However, there are also drawbacks. The principal one is that when we release our forecasts, a large number of financial market participants may see it as an obligation for us. In our view, if it is seen as an obligation, it may have negative repercussions for the economy when economic agents rely on predictions which fail to come true.
Therefore, we believe, as before, that the drawbacks outweigh the advantages. Certainly, we will continue this analysis and our assessment may evolve, though I still cannot tell to what extent. Moreover, only some countries, not a majority, release key rate forecasts, and many of them see the same drawbacks as we do.
Nevertheless, we certainly want to be more predictable for market participants, and the effect would absolutely be positive if market participants gained insight into our policy and faced fewer surprises.
I can tell you that we have also looked into the publication of minutes. We were asked to release our minutes, and we discussed the issue as well. However, I should say that our press releases, for example, are more detailed than those of the central banks in the countries where they release minutes. Moreover, our detailed press releases are posted almost immediately, whereas the minutes are released with a lag.
In addition, as you may know, we have shifted the schedule of our Monetary Policy Report publications, and they are now released one week after our discussions. In fact, they reflect the contents of the discussions we have at our Board meetings. Our detailed press releases and reports serve the purpose of providing more information about the logic behind our decision and raising transparency. We have a stake in it.
QUESTION from RIA Novosti:
Ms Nabiullina, I have several questions. The press release says that the monetary policy easing that has already been undertaken may have a stronger upward effect on inflation than the Bank of Russia estimates. Could you please provide more detail? This is about the five rate cuts in 2019, by a total of 1.5 pp, right? Do you have any estimates as to what effect this may have on inflation?
And the next question. What, in the Bank of Russia’s opinion, is the reason behind the current appreciation of the ruble?
Also, I would like to ask you about the development of mortgage lending. As soon as today’s key rate decision was taken, analysts sent out reviews stating that the current key rate cut may give a boost to mortgage lending, and that its growth rate may reach 25% in 2020. Does the Bank of Russia agree with such forecasts?
ELVIRA NABIULLINA:
We have yet to estimate the cumulative effect of this year’s five rounds of monetary policy easing. This cumulative effect will continue over time because, according to our estimates, the transmission of our monetary policy decisions takes from three to six quarters. Certainly, the effects are seen in the economy and prices within a year.
As we have taken several decisions, they will have a cumulative effect. The economy and economic indicators will adjust to these decisions. This is an easing action, aimed at easing the monetary conditions. It is in progress. In our view, it has not been completed yet and will continue. We will evaluate the effect.
Moving forward to the appreciation of the ruble. Firstly, oil prices have been stable enough and the economy registered capital inflow primarily through that channel.
As far as the growth of mortgage lending is concerned, it is really high and we believe that it will remain so. Mortgage lending has good growth prospects. The latest mortgage rate stands at 9.4%. Formally, this is a historical low. The previous minimum was 9.41% (in October 2018 – editor’s note), and this figure is as of early November. We think that the interest rate may be even lower in December. And we can see room for a rate reduction to 7–8%.
Mortgage lending will grow at a rather high pace. Our estimate for the next year has not yet changed, and is at around 20%. The current growth rate is 17%. It is important to us that the quality of mortgage loans remains high. For this reason, we are discussing with the market the introduction of a debt burden indicator to be applied when mortgage loans are issued.
QUESTION from Interfax:
Let me return to the signal. Does the wording of the press release mean that you will be looking into the feasibility of a reduction in the key rate in the first half of the year and, as you have said, that rate cuts should not be expected from the upcoming meeting and a pause is more likely to be made in the first half of the year? This is the first question.
Question two. The Ministry of Finance has proposed amendments to the budget code as regards the investment of NWF funds in excess of 7% of GDP. Your assessment of this factor expressed in the press release remained unchanged; however, the data are already available. Do you see any risk from investing these funds and lending to other counties?
Another question, if I may. Do you see possible risks in changes to the currency structure of the NWF, a switch to other currencies and a possible decline in return on these funds?
ELVIRA NABIULLINA:
Our wording regarding the feasibility (that we will look into the feasibility of a key rate cut) suggests that the likelihood is more or less the same, but that such a decision may be taken later. For that reason, we deliberately wrote ‘in the first half of the year’. Nevertheless, the possibility remains, but when we use it will depend on new data and updates to our forecast.
Your next question is about spending the NWF. Indeed, as you may remember, we were somewhat concerned about the uncertainty over the use of NWF funds when they reach a certain level. However, as regards the solution currently proposed, if an amount of up to one trillion rubles is invested evenly over three years, we do not expect any significant macroeconomic consequences. We can consider it in more detail if detailed parameters of this solution are provided. However, we assume that the spending will be even and transparent. That is what the Ministry of Finance says. For that reason, we do not mention it as a risk and assume that the decision will be balanced.
As regards the choice between whether to spend these funds in Russia or abroad, it may more or less have an impact on the efficiency and the potential growth rate of the economy as a whole; however, it will not affect macroeconomic stability, at least, not in such amounts.
The currency structure of the NWF. Indeed, we consider the currency structure of the NWF among the factors. However, you know that we prefer not to speak about our future steps in FX asset management.
QUESTION from Reuters:
In October, you communicated that the Bank of Russia expected that the US Fed would cut its policy rate twice in the coming year. How have you revised your forecast since the US Fed’s last meeting? What revisions, if any, have been made to the neutral interest rate estimate for Russia?
ELVIRA NABIULLINA:
We have taken the latest decisions of the US Fed into account and do not expect any changes in the Fed’s policy rate next year. This is assumed in our forecast.
As regards the level of the neutral rate, we have left it unchanged. Our assumption is based on the previous estimates of the neutral rate – a 6–7% range in nominal terms. Currently available data are insufficient for us to revise the range of the neutral rate.
The economy has been functioning in neutral monetary conditions for too short a period. We only stepped into the neutral monetary policy area in the middle of this year, according to our estimates. We need to accumulate data on all the parameters to understand whether this is really a neutral level and this rate range corresponds to our 4% target, and to estimate all these factors. It is too early to speak about revisions or setting goals to change the estimates of the neutral range.
QUESTION from UralBusinessConsulting information and analytical agency (Yekaterinburg), RIAMO Agency (Moscow Region) and BankNN (Nizhny Novgorod):
Is further decline in inflation dangerous for the regional economies? Which factors are driving this decline?
ELVIRA NABIULLINA:
It is not dangerous. Quite the contrary, low inflation helps reduce interest rates in the economy and increases the affordability of loans and the real income of households. Meanwhile, it is important to us that inflation holds at 4% in the medium term. We think that this level is the most appropriate for our economy.
Indeed, inflation fluctuates, it may fall below 4% or rise above 4% on the back of various, mostly temporary, factors. Our goal is to return it to 4%. We have all the tools we need to deliver on this goal.
You may remember when inflation started to rise last year, and at the beginning of last year inflation was low, much lower than we have now: inflation stood at 2.2% and rose to 4.3% by year-end. In the first half of this year, inflation peaked at 5.3%, for clear reasons, including the VAT increase. However, we have all the instruments to bring it back to the 4% target irrespective of whether it is above or below 4%.
Meanwhile, our steps depend on our estimates of the factors which lead to inflation deviating from the target. If they are temporary factors (their effect will fade over a certain period of time), there may be no need to resort to monetary policy measures. If we observe permanent factors, we take monetary policy measures.
Let me remind you that our policy is aimed at bringing inflation back to the 4% target and holding it close to this level.
QUESTION from Kommersant:
Two questions, if I may. I think since the end of summer, the wording of the Bank of Russia’s key rate press releases has invariably stated that the pro-inflationary risks posed by budget expenditure are low and the rise in expenditure is likely to be more distributed over time. Circumstances are changing and the sense of this wording is changing as well. Can you confirm that you really mean ‘the first half of 2020’?
And question two, please. Slack aggregate demand is caused by weak public demand. And how does it correlate with slack private demand? What, in your opinion, are key factors of slack private demand?
ELVIRA NABIULLINA:
Thank you very much. Indeed, we have repeated this phrase about budget expenditure for some time. We became focused on budget expenditure in our press releases because last year a pronounced imbalance was revealed, and it may even be more pronounced than in previous years. Budget expenditure has always been uneven, we are aware of that and have even started to calculate a certain seasonality. However, last year there were circumstances associated with the launch of national projects. Naturally, this requires certain preparation and orchestrated actions. We were concerned about this unevenness, about how quickly the expenditure which was not realised in full in the first half of the year would be set off.
We are now becoming convinced that this process will be distributed over time, and do not see any risks. However, if no additional risks arise, we will look into the need to cover this issue in our press releases.
Your second question is about aggregate demand. I can say that it was also quite uneven: it was rather low in the first half of the year, and in the second half we could see public demand growing. In our view, in the second half of the year, budget expenditure was overall of stimulating nature.
Private demand and consumer demand started growing, too, on the back of low inflation and despite slowing growth in consumer lending. Retail trade data suggest a revival. However, private investment demand is low and weak. Private investments continue to shrink. I think this points to the respective investment climate and the need for structural reforms. Certainly, demand in the economy depends not only on monetary or fiscal policy. It also depends on such parameters as investment attractiveness and the investment climate. We can see that demand is weak judging by these parameters.
QUESTION from Bloomberg:
Am I right to think, given your words, that you take into account that the US Fed’s rate will not change in the next year, that you are not going to revise the neutral range and it may take you longer to estimate the feasibility of further easing, and that the minimum key rate that can be expected next year is 6%?
ELVIRA NABIULLINA:
You are suggesting, understandably, that we describe the path for the key rate more clearly. Now we can only repeat that we can see potential, room for reduction. We have yet to reach the lower bound of the neutral range.
For this reason, there is room. When we use it depends on the factors I have mentioned, the data we receive, and our estimates of effects we cannot estimate now because of a lack of data, especially temporary and permanent factors. If these temporary, largely disinflationary, factors which brought inflation below the target discontinue, monetary policy will also be less responsive.
We really need to assess these factors. However, we do see room for reduction. When will we use it? The economy is developing, life goes on and we will analyse it. This is why we often hold Board meeting to update our estimates.
QUESTION from Arig Us, a TV and radio broadcaster (Ulan-Ude), RBC Rostov and Severnaya Osetiya, a newspaper:
You have said that interest rates on mortgage loans may fall in the near future. How likely is it?
We are interested in your forecast for credit and deposit rates. How might key rate revisions affect them? Why are interest rates on loans in Russia among the highest in the world?
ELVIRA NABIULLINA:
I have partially answered your question about mortgage lending. We do see room for a decrease in mortgage rates to 7–8% and consider this figure to be realistic.
As for interest rates in the economy as a whole, we forecast further reduction in interest rates on loans and deposits because we have repeatedly cut the key rate. This translates into a reduction in various interest rates in the economy, mostly those on loans and deposits.
I especially emphasise that deposit rates are still attractive for savings. This is also very important, because, when we look at interest rates, everyone wants lending rates to be low and deposit rates to be high. However, they should always be balanced somehow. We can see that lending rates make loans more affordable while deposit rates still offer attractive saving options.
Speaking about the world’s highest interest rates, in nominal terms our rates really do seem high. However, in real terms adjusted for inflation – in many countries both inflation and the inflation target are lower – our real rates approximate those in other emerging markets.
We can see that loans are becoming more affordable; the affordability of loans is no longer among the top-three issues for businesses, including small businesses.
QUESTION from Bloomberg:
Two questions, or maybe one and a half. The first one is traditional, about the deadlock in the Russian economy. Consumers buy little because they do not have enough money, whereas the Government cannot spend the money it collected from people through tax increases, among other things. According to the Accounts Chamber’s forecasts, one trillion rubles will be left unspent this year. This is unprecedented.
What can be done about it in your opinion? I cannot accept an answer about structural reforms, because there were no structural reforms before, but money was still spent more efficiently. Maybe the Government should not have raised taxes and should have let people spend their money themselves? This would have increased demand and boosted the economy. The money has been collected but never spent. That is my first question.
The second question is inspired by the upcoming New Year. Yesterday, Christine Lagarde, the new head of the European Central Bank, was asked who she was. The financial market uses such metaphoric names like ‘hawk’ and ‘dove’. She asked us to call her an owl, a wise bird. What kind of bird are you, Ms Nabiullina? Thank you.
ELVIRA NABIULLINA:
To the second question I would answer that I am not sure if I am a bird. As regards the first question, I absolutely disagree with you that we should not take structural reforms into account or speak about them. It is exactly what we should talk about, it is the basis for raising the economy’s potential and is a stable basis for raising household income.
The matter is that for many years real household income has been supported by the use of oil rent in the economy. We understand that, on the one hand, it is short-sighted to rely only on high oil prices to ensure living standards, to say the least; such an approach results in instability of income. When prices are high, income is high; when prices are low, we reduce either household income or some necessary social or public expenditure.
For this reason, a fiscal rule was introduced which teaches us to live in the environment where our living standards and our economic development do not depend on prices, on how high they are.
Certainly, these structural reforms should also raise the quality of governance at all levels, in order to make the spending of these funds as efficient as possible. The VAT was raised not just to increase expenditures, but to tackle the bottlenecks in the economy, which, together with structural reforms, will allow a sustainable increase in economic growth.
We need infrastructure investments. That is clear. Private investment will not be made if there is no logistical capability in the economy, if products cannot be delivered. For this reason, we need to tackle bottlenecks in infrastructure, and need the budgetary funds to do it. We need to raise the quality of education and healthcare, because the new economy requires a labour force educated in a new way. Certainly, these expenditures are absolutely necessary.
We have always emphasised, from the macroeconomic point of view, that they should not simply be expenditures, amounts of money spent, but that they should produce the effect of a boost in potential for growth. Unless the potential is growing, how can we measure it? Productivity of labour is a primary criterion. Unless the potential is growing, it will have a proinflationary effect. Certainly, economic growth rates may rise in the short term because the expenditure is taken into account in GDP calculations, but we need real growth.
This makes me think that the efficient implementation of national projects can really boost economic growth and we assume it in our forecasts, in our baseline forecast for the end of the forecast horizon as we realise that it will take time. This may be done quickly or slowly, but that is outside of the area of my responsibility.
QUESTION from Interfax:
The Central Bank makes regular decisions on the countercyclical buffer and risk ratios. The next one should be made in December. The countercyclical buffer remains unchanged; however, do you foresee a rise in risk ratios, for instance, for consumer loans or maybe mortgages?
ELVIRA NABIULLINA:
For now, there is no need to raise risk ratios for consumer loans. We can see that the measures we took not only in October but since the middle of last year have had an effect. Consumer lending is currently slowing at the rate that we expected. Of course, we will keep track of these trends. If a need to make any changes arises, we are ready to act by raising risk ratios, among other things. You know, we have proposed introducing another instrument of macroprudential regulation in our country. I mean the quantitative restrictions used in many countries; however, this would require amendments to the legislation. Allow me to stress this point again. In our view, there is currently no need to apply such quantitative restrictions. Being aware that the adoption of laws takes a long time, we have proposed this facility for future periods.
Regarding mortgage lending. We really think it is feasible to introduce control over the debt burden in mortgage lending. We are discussing this option with the market. The reason why the debt burden is rising is irrelevant when borrowers cannot service their loans, either consumer loans or mortgage loans. When banks extend a mortgage loan, they should consider excessive debt burdens and whether borrowers can service their loans, and not simply rely on mortgaged property. For this reason, we think that this ratio should be introduced gradually. These are the changes of macroprudential regulation which we propose for retail lending segments, primarily, mortgage lending.
QUESTION from Reuters:
I would like to get some clarifications regarding the NWF. You have said that automatic netting is an unlikely option. What is a likely option than? Is it possible that the Central Bank will not transfer to the market all these foreign currency sales to be conducted by the Ministry of Finance?
ELVIRA NABIULLINA:
This issue is currently under discussion. I assure you that we will publicly communicate any revisions to our procedures, so that our actions can be anticipated.
Thank you.