Bank of Russia Governor Elvira Nabiullina speaks at plenary session of Russia’s State Duma
Good afternoon, Mr Volodin. Good afternoon, esteemed deputies.
Every year, the Bank of Russia presents its Monetary Policy Guidelines at a plenary session of the State Duma. As Mr Volodin has just said, we had a very meaningful discussion of the Guidelines at the meeting of the working group, within the State Duma committees and with the parliamentary fractions. I would like to thank the deputies for their great efforts in this area. Your comments help us enhance both our approaches to monetary policy and the format we use to present our key documents.
When the Guidelines are considered by the Duma, the discussion customarily goes beyond monetary policy exclusively. Indeed, monetary policy creates the conditions for development. And I think it would be right to talk both about how we have been working to achieve our goal in the past and how we are going to reach it in the future. The benefits of low inflation for the economy and its influence on the evolution of the financial system are probably even more important.
I will first talk about the economic situation.
This year, economic growth was below our expectations. Yet, today the economy is gaining pace. In the third quarter, it grew by 1.7% year-over-year. This upward trend is driven by a good harvest, trade, and faster budget spending. It is worth reminding that delays in budget spending weighed on growth in the second half of the year and restrained the pace of inflation decrease. According to our estimates, fiscal policy is now ceasing to be contractionary and turning into expansionary.
In its turn, the Bank of Russia is ensuring price and financial stability so as to create favourable conditions for economic growth. This forms the environment for doing business today and in the future. Companies’ business planning extends not just for a quarter or a year, but for several years ahead. And low inflation is a key prerequisite for business planning.
As you certainly know, our monetary policy is aimed at keeping inflation close to the 4% target, and we adjust the key rate depending on our forecast and the factors and risks behind it.
Last year, when I presented the Guidelines here, we were struggling to cope with the increased risks of inflation acceleration. Over the year, we had observed growing petrol prices and turbulence in foreign financial markets, and we also expected a rise in prices following the VAT rate hike in early 2019. At that time, we raised the key rate twice in order to promptly return inflation to the target. Overall, the key rate increased by 0.5 p.p. Since then, as inflation pressure dissipated, we have reduced the key rate by 1.25 p.p.
As a result of our preventive measures, the upsurge in inflation was relatively moderate – up to 5.3%. Later on, inflation gradually returned to our 4% target and will come in at 3.2–3.7% by the end of this year.
The faster drop in inflation was largely the result of delays in budget spending: we had factored in these expenses in our forecast and they did influence our key rate decisions. If we had been aware of the actual spending plan, we could have possibly started to decrease the key rate earlier. We are now observing catch-up growth of spending. If we assess the tightness of fiscal policy based on the non-oil and gas deficit, it considerably shrank in the federal budget – from 6.4% of GDP in October 2018 to 5.1% of GDP this August. We only expect it to reach the target of 5.9–6.0% by the end of the year.
One-fourth of aggregate demand is satisfied through the budget; therefore, the uniformity of budget spending is essential for monetary policy to more efficiently achieve its goals. This year was actually a transition period when we were adjusting to the VAT rate increase and a more extensive implementation of national projects.
According to our three-year forecast, inflation will remain close to the target throughout the entire forecast horizon, and economic growth will gradually pick up.
The key rate is currently 6.5%. This is the lowest level since mid-2014. It is important not to reduce the key rate through inflation acceleration, but to ensure that loan interest rates follow its downward path. Loan rates are currently higher than in 2013 when the key rate was 5.5%.
Today, investment growth has substantially declined worldwide. I would like to emphasise that this is happening amid record-low loan rates in many countries. Investments are decreasing not because loans are inaccessible, but because there are higher uncertainties about development prospects and global demand on the back of trade tensions. At times, we hear suggestions that interest rates should be lower or even negative as in Europe in order to push up lending and economic growth. But negative rates would not eliminate the factors hindering investment. Lending in the majority of countries that have resorted to negative rates has not increased, but even slowed down in a number of cases.
Undoubtedly, it is the resistance of our economy to the external environment and the soundness of our financial system that directly influence investment and economic growth. Financial stability and price stability are the fundamental prerequisites (or ‘zero conditions’, if you prefer) for economic growth.
We do realise that external circumstances are unlikely to become more favourable: the global economy is declining, which can drag down prices and demand for our exports (and this in fact is happening now), and trade wars are showing no signs of abatement. However, our goal is not to let these circumstances disturb the development of our country.
What are we doing to secure financial stability?
Firstly, financial institutions. It is critical that banks are sustainable and have a safety buffer. This is the aim of our policy for resolution and improvement of the banking sector.
Secondly, we are accumulating reserves and transforming their structure.
As you may remember, those were the accumulated reserves that helped us address the shocks during the 2014 crisis: among other things, they enabled us to launch foreign currency refinancing to help Russian businesses smoothly repay their external debt when foreign markets closed themselves off to many of them. This year, our foreign currency reserves have increased by another 72 billion US dollars. It should be noted that since early 2018 we have quite significantly altered the structure of our reserves for de-dollarisation purposes. This gives us greater protection and makes us more confident in the face of any potential economic and geopolitical circumstances.
Thirdly, protection against oil price fluctuations and other external factors. It is ensured owing to the floating exchange rate of the ruble and the implementation of the fiscal rule.
The liquid part of the National Wealth Fund will exceed 7% of GDP, and the Government is holding discussions on how to best use this money. We expect that they will opt for preserving the most essential stabilising effect of the fiscal rule.
Finally, the de-dollarisation of the banking system. We all know how changes in external circumstances can turn large foreign currency liabilities into a problem. In recent years, we have been consistently reducing the proportion of foreign currency in banking through regulatory measures. Foreign currency lending to businesses has decreased from almost 40% in 2015 to 24.5% as of now.
At the same time, the share of settlements in national currencies with our key trade partners has been growing, which also protects us against dollar-related risks.
Summing up the part of my speech regarding monetary policy, I would like to stress that, in our opinion, our current standing is better than ever before in terms of price and financial stability, and the Government has accumulated sufficient resources to implement the development programme. This forms the basis for economic growth acceleration which is crucial for the country.
I will now talk about the areas of our work that also pave the way for better economic growth.
Lending development.
Lending to businesses is moderately increasing – by 3.6% over the first three quarters of the year. Moreover, growth of ruble loans is maintaining a sustainable pace of 10–12%. Banks have sufficient capital and available funds to expand lending.
Investment activity is dampened not by interest rates, but rather due to the quality of the business climate and general economic uncertainties.
Low economic growth this year is certainly a matter of concern. This is partially associated with temporary circumstances, including the aforementioned delays in budget spending, but largely with structural factors which are the primary ones. Overcoming these structural constraints is the key task for our economy.
On our part, we are changing our approaches to regulation (including in regards to project financing) in order to boost lending to the real sector. We have made the decision to use it not only in VEB projects and equity construction, but also in large investment projects in general.
The growth rate in consumer lending is higher than that in the corporate segment. To slow down this pace, we introduced a borrower’s debt burden ratio in October so as to avoid debt overburden among households. This measure is mostly preventive. According to our analysis, there are currently no risks to financial stability in this area. Simultaneously, the share of mortgage loans in consumer lending has expanded, which is a very positive factor. Annual growth of mortgage lending in September was 18.3%, which is slightly below last year’s readings, but this is still a good pace. Mortgage lending supports housing construction, and the construction industry can be a source of growth for other sectors.
Yet, as we all perfectly understand, it is inadmissible to pass on the burden of construction development to citizens without offering them any support in return. And this is exactly what was happening in equity construction. Many deputies received complaints from voters about this problem because it was impossible to hold developers liable and to get reimbursement.
Unfortunately, the attempts to use other schemes protecting citizens, including insurance, have not had their desired effect. The framework of the law made it possible for insurers to refuse to pay reimbursement to citizens, in many cases on legal grounds. As of now, the amended laws (and we also actively supported and promoted them) stipulate that both liability and insurance premiums should be transferred to the Fund for the Protection of Rights of Individuals Participating in Equity Construction. According to the laws, companies shall transfer about 8.3 billion rubles. As it currently stands, nine insurers have fully performed their obligation transferring 1.4 billion rubles, while two companies have not yet transferred 0.8 billion out of 2.4 billion rubles. However, the Respect and NASKO companies whose licences were revoked by the Bank of Russia are to transfer nearly 4.5 billion rubles.
The issue of the Respect company was a subject of discussion at the plenary session of the State Duma. I would like to stress that the Arbitration Court of Appeal validated that we acted in line with the law and that our orders on licence revocation were legitimate. The Bank of Russia submitted the documents regarding these companies’ operations to the law enforcement bodies.
And what is essential today is that the working group of the State Duma is developing additional systemic measures to prevent such situations and, first and foremost, to counteract the withdrawal of assets.
Next. Beginning in July, the Russian construction industry will switch to escrow accounts. Within this mechanism, construction is financed by banks, and citizens do not risk their money.
The next topic I would like to address is the development of cashless payments.
Why is it important?
It promotes transparency in the economy and supports e-commerce when a seller and a buyer may be thousands of kilometres away from each other. This enhances the security of payments, reduces cash collection costs, etc. Moreover, this improves the efficiency of our monetary policy.
Cashless payments are becoming increasingly popular among consumers, and we should provide convenient and secure tools for both person-to-person money transfers and for goods and service payments.
Five years ago, cashless payments accounted for as little as 30% of transactions, and nobody believed that this trend would change. But today, non-cash and cash payments total 65% and 35% respectively.
In 2015, we launched our national payment instrument – Mir cards, and all in-country transactions, including those via international payment cards, are now conducted through the National Payment Card System.
Mir cards are starting to expand into the member states of the Eurasian Economic Union and the CIS, and they are now accepted in Turkey and Vietnam.
This year, we launched the Faster Payments System (FPS). Today, it enables citizens to make cheap payments between 25 banks that are members of the FPS. Ten of the eleven largest banks have already joined this system. It eliminates the bank monopoly where a bank allows cheap money transfers within its own ecosystem, but establishes high fees and often a percentage of payments for making money transfers to another bank and even to another region.
In addition, we are currently testing the goods and service payment mechanism via QR codes using mobile telephones. The FPS fees are 2–3 times lower as compared to acquiring fees, and payment acceptance equipment is sufficiently affordable. Thus, costs go down, and cashless payments remain advantageous (as you may recall businesses used to complain a lot about high acquiring fees).
And the last topic I would like to speak about today is consumer protection and financial inclusion.
At the end of the day, consumer satisfaction is a key assessment criterion of our performance.
Compulsory motor third-party liability insurance (OSAGO) has been causing a lot of problems recently. In this regard, we have been taking efforts over the last several years aimed at increasing the affordability of insurance policies in some regions and improving the transparency of tariff setting. The other pressing issue is investment life insurance. We have encountered unfair practices in this area where the real return on products offered by sellers to consumers was below the declared level.
The number of complaints about OSAGO-related issues reduced by 40% this year. This implies that such measures as having a single OSAGO agent, electronic insurance policies, in-kind compensation and a tariff corridor have been efficient. And I would like to thank the deputies for their support of many initiatives that were extensively discussed in great detail. OSAGO tariffs dropped by 3.7% on average, and in some regions – by more than 10%.
As a result of the restrictions introduced in investment life insurance, this market contracted by 32%. But that was a carefully weighed decision. It was necessary. The experience in investment life insurance shows that it is essential to adopt laws on investor classification as soon as possible in order to prevent foisting high-risk products and services on individuals.
Financial inclusion. Last year, we launched special projects to enhance financial inclusion in the Far East, North Caucasus and southern regions of Russia. These are the territories where a considerable share of citizens reside in small and hard-to-reach localities and have experienced a shortage of financial services for a long time. Today, banks and Rostelecom are implementing there their projects supported by the Bank of Russia. These projects involve the use of mobile offices, cash withdrawal through cash desks and expanding access to the internet and mobile financial services. As a result, the share of localities experiencing inadequate financial inclusion reduced from 17% to 13.5% in the Far East alone, and the share of localities with a good level of financial inclusion was up from 58% to 84%. We intend to continue such projects. We believe that they are critical for enhancing financial inclusion.
To finish off, I would like to emphasise that we are seeing good progress in moving towards the goals that are important for the Russian population and economy: a stable inflation rate, a sustainable financial system and a more flexible financial market meeting the needs of the economy. We would not have been able to do even a half of this job without the support of legislators. I would like to thank you for your continuous, committed and extensive cooperation and for the discussions we have been holding to support the initiatives that are crucial for developing the financial system.