Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 24 July 2020
Today, the Bank of Russia Board of Directors made the decision to reduce the key rate by 25 bp down to 4.25% per annum. At the upcoming meetings, we will consider the necessity of further key rate reduction.
We have continued to ease monetary policy, primarily taking into account that the risks of the downward deviation of inflation from the 4% target in 2021 remain. These risks result from the slump in economic activity and the decline in domestic and external demand. According to our estimates, the recovery will take over 1.5 years, which will have a restraining effect on prices.
I would like to stress that the specifics of the current moment is that the situation associated with the pandemic and the easing of the restrictions both in Russia and abroad, in various regions and sectors, is unfolding very non-uniformly. In June — the first half of July, when Russia started to ease its lockdown requirements, economic processes in the country were reviving, which included the recovery of power consumption, rebounding consumer and investment demand, the expansion of construction and consumer goods output, and a slower annual decline in freight turnover and industrial output. However, although businesses’ and households’ sentiment was improving, overall they remained cautious amid the persisting high uncertainty about how the situation might be unfolding further on.
In June, the current monthly growth rates of consumer prices were significantly varying across different product and service groups due to the diverse impact of demand- and supply-side factors in individual markets. Nevertheless, overall inflationary pressure is weakening, after the increase in March — April, which is evidenced by stable inflation indicators, adjusted for one-off factors. Households’ and businesses’ inflation expectations have stabilised overall after the decrease in May — June. Professional analysts have lowered their inflation expectations for the next year beneath 4%.
We expect that the recovery pace in the economy and price dynamics will also remain non-uniform over the next few months, which may slightly obscure the developing trends. Nonetheless, in terms of the key rate decision and the prospects of monetary policy, it is more important to focus on the medium-term view on price and economic activity trends with account of sustainable factors. The economy will be returning to its potential progressively, and therefore disinflationary trends will prevail.
We have adjusted our assumptions of the annual GDP change only slightly, taking into account the influence of divergent factors.
On the one hand, this is a deeper decline in economic activity and in domestic and external demand in the second quarter, which resulted from the longer duration of the restrictions both in Russia and abroad than we had expected in April. According to our estimate, the GDP decrease in the second quarter equals
On the other hand, we have observed a substantial expansion of the budget-funded and other measures supporting the economy, compared to April, which is partially offsetting the decline in incomes, sustaining consumption and investment, and boosting a faster economic rebound. In the updated forecast, we have reflected that fiscal stimulus has increased nearly twice compared to the measures that had been in place when April’s forecast estimates were made. Moreover, economic recovery will also be promoted by the easing of monetary conditions owing to the significant reduction in the key rate.
Taking into account these factors, according to our forecast, GDP will decline by
Although we forecast significant recovery growth in 2021, economic activity will remain considerably below its 2019 level and below the potential. This implies that the restraining effect of aggregate demand on consumer price trends will persist in the next year. The reduced current monthly rates of price growth will remain at this level until the end of the year. Inflation will be returning to the 4% target gradually since it will take time for demand to recover, including owing to the easing of monetary policy. We forecast that annual inflation will range from 3.5% to 4.0% in 2021 and will stabilise close to 4% in 2022.
I would like to remind you that inflation is expected to reach
The reduction in the key rate since April is contributing to the further easing of monetary conditions. Interest rates in the banking sector are decreasing. However, we take into account that there are factors that may be restraining this process. These factors include increased credit risks and the resulting tightening of requirements for borrowers, as well as external factors that may cause risk premium fluctuations. Furthermore, we take into consideration that the regulatory easing and preferential lending programmes are also contributing to the easing of monetary conditions today.
Interest rates on deposits exceed the forecast inflation. Ruble-denominated household deposits keep growing. In June, their annual growth rate was 10.9%.
The easing of monetary conditions driven by the actual key rate reduction will support credit growth already this year. We estimate that the credit to the economy will expand by
When making our decision to cut the key rate, we also take into account the announced plans with regard to the fiscal policy, including the forthcoming budget consolidation in
Regarding the balance of payments, in
The increase in the expected negative balance of the financial account of the private sector is mainly related to the current account forecast revision. The forecast of the balance of payments also takes into account the plans of the Minfin to increase borrowing this year. Compared to the April forecast, we expect a less significant decline in foreign currency reserves in
The forecast of operations under the fiscal rule includes the completion of sale of foreign currency related to the deal with Sberbank shares. The mechanism, under which we sell this currency only if the price of Urals oil is below $25, expires on 30 September. If the current situation in the global oil market remains in August — September, we are planning to offset the balance of unsold foreign currency related to Sberbank shares with the amounts of purchases postponed since 2018 and pre-emptive sales that we conducted in March—April. The net balance is 185 billion rubles in the ruble equivalent. This amount of foreign currency will be evenly sold in addition to regular fiscal rule-based operations over the course of the fourth quarter of 2020.
Speaking about forecast risk factors, uncertainty remains high, both in terms of the nature of the slowdown and recovery processes in the Russian and global economies and in terms of the scale of the effect that the pandemic and restrictive measures could have on the economic growth potential in Russia and abroad. This concerns both the production recovery potential and possible changes in households’ consumer and saving preferences. These factors, in turn, can have a considerable effect on the inflation forecast.
Uncertainty caused by external conditions is further exacerbated by increased tensions between the US and China, which creates risks to both global economic growth and the dynamics of global commodity and financial markets. There remain risks on the part of other geopolitical factors as well.
Besides, at the current stage, with the restrictions still in place, it is difficult to unambiguously estimate how quickly and widely the key rate reduction will translate into the easing of monetary conditions and further on, into the dynamics of economic activity and inflation. As we have noted earlier, in the near future they will be influenced by a wide range of diverse factors.
I would like to point out that at our today's meeting we have returned to our standard key rate change pace, considering that finer tuning of the monetary policy within the baseline forecast is necessary now, as compared to the previous months, when a decisive reaction of the monetary policy to shocks was justified. In the future, we will estimate the nature of changes in monetary conditions, recovery processes in the economy and price dynamics and, based on these factors, consider the necessity to cut the key rate at the upcoming meetings. In general, we believe that there may still be room for monetary policy easing.
When making our key rate decision, we also discussed the neutral key rate range. At the current stage, we have reviewed our real neutral key rate range downwards to
In conclusion, let me reiterate that we make our monetary policy decisions primarily based on our objective to stabilise inflation close to the 4% target.
Question and answer session for the media
QUESTION (Reuters agency):
Has the factor of August, a traditionally difficult month for Russia, influenced the current decision of the Central Bank?
Our decision was influenced by our analysis of what is happening in the economy, and what the latest developments are. The most important thing is that we still influence the future with our decisions. Moreover, as I have already said — I repeat it every time — our decisions have a lag effect and therefore they are influenced by the forecast and those developments that we perceive for the coming period. We updated the forecast, as we had a pivotal meeting. We reviewed the forecasts, based on which our decision was made. There are no other additional factors you are talking about.
QUESTION (Kommersant newspaper):
What parameters of fiscal consolidation have you taken into consideration for the next year or two?
We have taken the parameters that the Ministry of Finance is currently considering, assuming that there will have been a transition to the fiscal rule by 2022. When we were considering the impact of the budget on our decisions in April, firstly, a smaller amount of fiscal measures was expected for 2020 at that time. We have now elaborated on them and, certainly, got an insight into a new borrowing programme and additional borrowings. As for 2021, yes, as we see, there will be gradual fiscal consolidation in order to move to fiscal rule parameters by 2022.
However, in our opinion, it is during this period, when there will be fiscal consolidation (2021), that the effect of easing monetary policy will be perfectly seen. There will be significant easing that has occurred this year.
QUESTION (TASS agency):
I have a question about repo options. Long-term repo auctions for one month and one year did not take place this week due to the absence of bids. Does the regulator still see the need for such auctions?
Thank you for your question. Even when we were introducing these auctions, and more long-term ones, if you remember, we were always saying that we saw no problems with the liquidity of the banking sector. Generally speaking, it is comfortable. But since there was concern and banks had to carry out considerable loan restructuring, and for them to be comfortable with liquidity and understand this comfort with liquidity, we have introduced these tools.
It was foreseen and expected, there is practically no demand for them, but for now we are going to preserve them in order to ensure and continue to provide this comfort in relation to liquidity, so that banks can feel more at ease. Moreover, we are still currently in a period of economic recovery.
QUESTION (Interfax agency):
The Central Bank recommended that banks, if they take advantage of regulatory relaxation, suspend dividend payments. However, some banks — although, not many — still made decisions to pay dividends. According to your estimates, how many banks have suspended dividend payments, and how many have made a decision to pay? Accordingly, how many banks have used the regulatory relaxation? And another question. Do you think large banks will change their dividend policy on payments from net profit downward due to the situation? And a question about acquiring. The Central Bank has the legal right to limit the fee for acquiring services. Are you going to take advantage of this in the autumn, when the relaxation is over?
Thank you for your questions. As for dividends, we really did recommend that banks suspend dividend payments until August—September during this difficult period. Nevertheless, a few banks took decisions to make payments. These banks account for 10% of all banks. There are no systemically important large banks among them. Their dividends amount to 25 billion for the banking sector as a whole, an insignificant amount that does not affect the financial position of the banking sector at large.
Banks use the relaxation in different ways. Right now we are analysing which regulatory relaxations were most in demand, which were not in demand at all, and to what extent banks are ready to gradually recover from these relaxations. Such analysis is being carried out, and sometime in the middle of next month, we will let the public and the banking sector know our proposition for gradual recovery from the relaxations — some might be extended, modified, or cancelled.
However, the banks that have used the relaxations do not really pay dividends. Among other things, we also made recommendations regarding payment of bonuses to the management. It was recommended to increase the portion of deferred compensation for those who make such decisions.
As for decision-making in August—September, including in large banks, each bank will also have to individually look at what is happening with their balance sheets, what effect the situation with the change in the quality of loans, the deterioration in the quality of loans, and the restructuring has. Update their forecasts, assess the capital adequacy in the future — and based on this assess whether they are able to pay dividends for the past year. I do not exclude that a number of banks will either forego paying dividends completely or reduce their amount.
This will be done based on analysis performed by each bank. We will also thoroughly review the results of this analysis in the banking system.
As for acquiring. We made the decision to limit, used our right granted by the lawmaker, to limit the rates for online transactions. We did this just at the time when there were restrictive measures, self-isolation, so that people did not leave the house once again and could make online purchases. This was a very popular service, and we limited the fees for acquiring services for this period.
For now, we are not inclined to extend these restrictions. Why? Certainly, we see that this has had a positive impact on the ability of people to make such online purchases. However, we also see that banks have begun to cut some loyalty programmes for consumers. We think it should be considered — there are also some downsides. Not all of our restrictions on fees for acquiring services are expressed in lower prices for consumers, and such effects are even coming to light.
Therefore, in our opinion, it is necessary to move on, creating competition and developing competition between different payment systems, and thereby entail a decrease in market value, in particular in transaction costs in the economy.
QUESTION (Bloomberg agency):
The government is discussing the expedience of introducing a hedging mechanism for oil prices, similar to Mexico. In your opinion, would this be appropriate for Russia? And, how does that fit in with the fiscal rule? Can this mechanism supplement it, or is it superfluous?
We have not seen specific proposals on this matter yet. However, if we’re talking about us directly copying the Mexican experience, we do not support such a proposal. Firstly, we believe that the fiscal rule is fulfilling its function quite well, indeed. If they change it to something else, then they need to realise that a different mechanism will be better. We are not at all convinced of that. To supplement it? They also need to understand at what price this mechanism will supplement the fiscal rule. Moreover, it should be regarded that the volumes of oil production and oil export in Mexico are much less than in Russia. When it comes to hedging all volumes, we have big doubts that hedging markets will allow this operation to happen or it will be very expensive. If it is assumed to be financed from the National Wealth Fund (NWF), this is a rather expensive operation, and in my view, this is not the best way to spend money from the NWF. It will be expensive at such volumes. Besides, it should be borne in mind that now the principle of using NWF funds provides for the principle of return on investment. In this case, this principle will not be fully observed. Therefore, we do not support this proposal now — the way we understand it.
QUESTION (RIA Novosti agency):
Do you see the potential for further key rate cuts in 2020?
We admit that such potential remains, but we will assess the situation based on the data that we will receive, on the processes that are taking place. There is still a lot of uncertainty on this matter. Nevertheless, on the one hand, we see that disinflationary factors will prevail, at least until the end of this year, and they will remain in effect next year. This is due to the fact that there is a decrease in demand. Nevertheless, we will have to assess the effects of the monetary policy easing. Let me remind you: we have made quite significant steps that are spread out over time. Therefore, there is such potential. To know what it is like — it requires a detailed analysis, a detailed assessment, taking into account the future developments.
QUESTION (Interfax agency):
When, in your opinion, will such a price for oil appear, and when will the Central Bank, within the framework of the fiscal rule and on behalf of the Ministry of Finance, turn from selling foreign currency to buying it? And, the 185 billion rubles that remain, which you will realise during the fourth quarter, how will you take them into account? Will you sell them, or can you also offset them later, depending on the change in the operations? That is the first question. The second one is: it is believed that there is a slight economic recovery after the bottom in April—May, but can this recovery in the economy fizzle out in the fourth quarter or at the beginning of next year? Do you think, perhaps, that some additional measures are needed from the Central Bank and the Government to support the economy?
According to our forecast, according to the baseline scenario, if life develops in accordance with the baseline scenario, then we will start buying currency according to the fiscal rule in 2022. We have an oil price forecast for 2022 — $45 per barrel. As for the 185 billion rubles, the same: if the developments are in accordance with our baseline scenario, we will sell the currency evenly throughout the fourth quarter. We want to sell it before the end of this year.
As for the future dynamics, we do not expect the recovery to fizzle out in the fourth quarter. We proceed from the assumption that the recovery of the Russian economy will continue. Additional measures? At this stage, we do not see that they are necessary, because the main measures — first of all, the measures of the Government — will continue to be effective this year, almost until the end of the year. The big, serious measures that have an impact on economic activity, support the economy.
QUESTION (Panorama Goroda newspaper, Ryazan; specialised portal BankNN, Nizhny Novgorod; Delovoy Peterburg newspaper, St. Petersburg; Yuzhnouralskaya Panorama newspaper, Chelyabinsk):
The decrease in the key rate is followed by a change in bank rates. In such situation, are banks not threatened by massive capital outflows and does the Central Bank take into account such risks when making its decisions?
Definitely, we are closely monitoring the dynamics of all rates in the economy (deposit, lending rates). When we ease the monetary policy, most people probably pay attention to the fact that the interest rates are reduced, investing their hope in the increasing availability of loans. However, on the other hand, naturally, during the same period there is a decrease in deposit rates. It happens at a different pace, in different ways. Now, in our opinion, deposit rates are higher than inflation forecasts, namely, they (real rates — Ed.) remain positive. Well, we see from the indicators of bank deposits, deposits of the population that they are still growing. Yes, we had some decline in April—May. If you remember, we explained it — this is understandable: it was obvious, in conditions of self-isolation people withdrew money from their deposits in order to be able to settle accounts. However, thereafter we see the deposit growth. Well, this is very important when making decisions — to see what is happening with deposit and lending rates. By the way, we understand that banks are very attentive to the attractiveness of the liabilities of citizens, on which basis they develop their interest rate policy. This is actually one of the factors that we take into account when we decide on a key rate.
QUESTION (Izvestia newspaper):
My question partly relates to the previous one, it also concerns deposit rates. At the end of autumn, last year, there was a lively discussion of whether negative rates on deposits could be introduced. Banks really want this, and told us so. And since we are now clearly entering a long, protracted new crisis and it is unlikely that central banks will tighten monetary policy, I would like to ask, whether there are any plans to return and lawfully change the requirements for banks to pay positive yield?
You probably mean the possibility of negative rates on foreign currency deposits, this was discussed in the autumn. We were really considering, as you remember, different options, including amending the legislation, but at that time we took it as inappropriate, proceeding, firstly, from the fact that the problem of negative rates for banks was not widespread, and banks were solving these problems, including through offering more current accounts, introducing certain fees.
Now, I have no evidence that would force us to reconsider this approach. So far, we do not see the need and expediency of amending the legislation, but, of course, we will see what the situation will be.
However, we do not intend to pursue a policy of negative rates for Russian rubles. Now we are talking only about the exchange rates in connection with the actions and decisions of the central banks, primarily in the United States and the European Union.
QUESTION (Banki.ru portal):
Is another rate cut possible at the September meeting, will the Central Bank consider a step over 25 basis points?
I want to highlight once again. Perhaps, there is room for further monetary policy easing. To what extent it will be possible to use it, we will assess based on future developments in the economy, we will assess all incoming data.
Within the baseline scenario, we believe we are back to the standard step. Let me remind you: we generally prefer to act gradually, smoothly, in order to assess all the effects of the decisions we make. However, we are ready to take more than the standard step when circumstances seriously change, and this is reflected in the fact that we seriously revise the forecast, and then we need to adjust the monetary policy more significantly.
Certainly, we are ready to proceed with a standard step if this is the baseline scenario.
QUESTION (The Bell):
This week, two countries — the USA and the UK — announced their next plans to impose sanctions on Russia. I would like to ask: how serious do you think these plans are, and do you perceive this as an additional risk for the Russian ruble?
We have long ceased to assess the seriousness of the sanctions plans — this is a thankless task. However, we always, when we make our forecasts, make a decision, try to be conservative, realising the possibility of risk. The main thing is that we have all the tools to deal with such risks, and we are pursuing the policy that implies financial stability, less vulnerability of our economy and financial system to external shocks, including such geopolitical events. This is a focus of our policy so that there are no unexpected negative consequences.
QUESTION (Reuters agency):
Does the Central Bank intend to resume gold purchases, or has the growth in gold exports shown the effectiveness of the recent decision and the regulator will not resume operations at least until the end of the year?
Colleagues, you know, we usually do not comment on our plans for gold and foreign exchange reserves, but I can say that, in principle, we have enough gold to ensure the diversification of our gold and foreign exchange reserves.
By the way, if you remember, there were some concerns as for the possibility of such suspension of gold purchases that we made to be offset by the growth of gold exports. We see that the export of gold is growing well and additional currency is inflowing to our country, so everything is actually fine here.
QUESTION (RBC newspaper):
What, in your opinion, explains the continued growth in the turnover of cash in circulation? What economic agents are demanding cash, given that individuals have stopped taking money from banks? Do you see the risk of a part of the economy leaving for ‘grey zone’ amid the crisis?
Indeed, at first, we associated the demand for cash, and, actually, this was the case, with the fact that people were accumulating cash for the period of restrictions and self-isolation. Somewhere they have probably returned this money to banks, somewhere they are still holding it.
Secondly, the change of situation in the tourism sector has influenced the demand for cash. We see that external tourism, trips abroad are falling, domestic tourism is growing, and often it is also associated with the fact that people withdraw cash when travelling around inside the country — this is one of the factors.
Moreover, it is quite possible, we are also considering this version (we will follow this situation), that companies started using more cash for settlements with each other and their employees in the current conditions. This situation requires additional analysis — we are monitoring it and will continue to monitor what the dynamics of cash and factors affecting this dynamics will be.
QUESTION (Bloomberg agency):
I have two questions. One is about the household income. In fact, Rosstat showed that in the second quarter, household income fell by 8% — this is the maximum income fall for the quarter since 1998. Even despite all the support from state and child benefits totalling 10,000 rubles paid in the second quarter, no one is expecting further large injections.
How do you assess the risks of further fall in household income? How do you calculate the consequences, take this factor into account? Are you not afraid that the rate is now at a historically low level and people will take loans, and then they will not be able to pay off because there is no money? This first question is so long.
The second question is short. We are all arguing, what is depicted on your brooch — a horseshoe or victory? Can you explain to us so that we can write about what this sign is?
As for the second question, if I explain it, it would be rather dull, so different interpretations and versions are possible, I think.
As for household income: indeed, amid a sharp decline in economic activity, according to our estimates, GDP in the second quarter fell by
In our baseline forecast, we see an economic recovery, and the full recovery of both the economy and income, of course, will take some time, so support measures still have some temporary effect. For example, loans as wage payment support are valid this year and remain next year, they do not suddenly disappear. Therefore, in our opinion, surely, the main thing that should contribute to income is the recovery of economic activity.
We take into account the potential dynamics of income when making our decisions. We see consumer lending recovering faster than we expected in April. In April, if you remember, we made a forecast that consumer lending this year would fall by about 5 per cent. Now our estimates are that it will grow by
In terms of our regulation, we have accumulated buffers for consumer lending. This is about 600 billion rubles. And we are waiting when banks will begin to actively recognise losses on these loans, as there are loan payment holidays now, and we can begin to gradually use part of the buffers.
But at the same time, we are not going to refuse from the regulation related to the maximum burden of people debt. This regulation should remain, because, certainly, it should not happen that people would again take a lot of loans and place themselves into debt bondage. Here we will be careful, if necessary, will adjust our regulation among other things, so that there is no excessive lending. The restriction through the debt burden indicator will continue. However, consumer loans will definitely recover and support economic growth, and support consumer activity.
QUESTION (Russia 24 TV channel):
The Bank of Russia is cutting the neutral rate. Please tell us what this means for ordinary people, for an average consumer. Is something changing for them, or maybe the financial market has already taken this into account?
I will start by stressing once again that the neutral rate is a rather conditional indicator; it is not an observable one. This is an indicator that, in theory, indicates where the rate should be, while inflation is targeting, we have 4%, and so that there is no significant deviation of emission, that is GDP, employment from potential. Moreover, we take into account, as one of the factors, our assessments, the assessments of the Board of Directors, where this neutral rate is, where it may be, when making decisions. However, this, of course, is not the only factor. We can also pursue a soft monetary policy when the rate is below the corridor that we regard as neutral.
In general, if we talk about what the neutral rate impacts, it rather sets a benchmark for where the key rate can be on average over a long period of time.
QUESTION (Izvestia newspaper):
There is a lot of talking now about the second wave of the pandemic. Are regulators preparing for such developments, and if so, how?
We are considering different risks for our baseline scenario. Of course, there are such risks, and in some countries, we see, risks of the second wave may materialise. Nevertheless, as many experts, analysts assume, even if such a risk takes place, we already have some preparedness, and it is unlikely that this will be connected with the same level of restrictions.
In addition, we know that work is underway to develop vaccines. Therefore, we always take this into account as a risk. In conditions like nowadays, when there is a lot of uncertainty, a lot of risks, we all consider them and therefore prefer to move step-by-step in the current conditions.
As for the risk scenario, we will present it already in the Main Objectives of the Monetary Policy, which we will begin to discuss in September, and you will see our understanding of the risk scenario.
QUESTION (PLUS magazine):
What is the Bank of Russia’s attitude to the bill that bans the bank fee for payments made for housing and utility services?
Basically, we generally support this bill. For the population, which is obliged to pay for housing and utility services, in this sense, the fee becomes a kind of imputed charge for people when paying for such services. However, at the same time, we consider it important to address the issue: how, by whom and by what means the banks will be compensated for the costs inevitably incurred by banks when they administer such payments.
QUESTION (Nika TV channel, Kaluga):
Does the Bank of Russia plan to communicate the expected path of the key rate? Forward guidance, as practised in a number of countries.
Indeed, this is practised in a number of countries, and we are constantly asked to provide more predictability about our monetary policy, including by publishing the key rate path.
We try very hard to be predictable, so we try to explain the logic of our actions — we publish many reports, analytical materials, from which it would be clear why we make certain decisions. Nevertheless, indeed, there is such experience when they publish the regulator’s view of how the key rate might show itself. We continue to discuss this. We continue to discuss, among other things, the format of how such a vision of the expected path of the key rate could be published; there are also different variants. Well, we want to find the format that will allow us to correctly interpret such a publication.
It is very important for us that this is not perceived as an obligation, and if the situation later changes and the Central Bank is forced to adjust its monetary policy, so that it would not appear as a surprise to economic agents. From this point of view, we are looking for such a format. I think that we will discuss this whole issue in more detail in the Main Objectives of the Monetary Policy.
Once again. A format that will allow to consider the full range of variations that the Board of Directors considers. Believe me, when we discuss the key rate, we consider different variations of developments, different factors, different risks. And how do you present it? This cannot be presented in one line, so we will need to find this format, and if we find it, we will then proceed with publishing. However, so far, this is still not a fact, discussions are being held.
Thank you very much. I thank everyone for your attention, patience and questions.