Elvira Nabiullina’s speech at joint meeting of State Duma dedicated committees on Monetary Policy Guidelines for 2021–2023

Good afternoon, fellow colleagues,

I would like to thank you for the opportunity to present the Monetary Policy Guidelines in the run-up to the State Duma plenary session.

Our session today was preceded by meetings of the Expert Council on Monetary Policy and a working group, where both our current monetary policy and forecast were discussed in detail. For us, this review cycle of the Guidelines is particularly important, given the unprecedented challenges for the economy, economic policy, and especially for monetary policy, incurred by the pandemic. Another issue is high uncertainty, and that is why we need to make decisions faster to mitigate the impact of both the pandemic itself and measures to curb it.

I would like to begin by describing monetary policy measures that we took this year and the effects of these and other measures taken by the Bank of Russia in cooperation with the Government — that is, how our efforts to mitigate the impact of the pandemic have influenced lending and inflation. Since February, when the first signs of coronavirus spreading outside China manifested themselves, both the Bank of Russia and the Government have been fighting the common enemy — the consequences of the pandemic for the health and well-being of Russians — and building a favourable environment for sustainable business operations. Budget programmes, loan restructuring and concessional lending programmes provided support for people and businesses at the most difficult time during the most stringent restrictive measures.

The effects of monetary policy easing on the economy and aggregate demand are gradual, and this year’s easing is already spurring the recovery of economic activity, and most importantly, will continue to do so in 2021.

Since the beginning of the year, the Bank of Russia (as Anatoly Aksakov has already mentioned) has been reducing the key rate, and today it is at a historic low of 4.25%.

At the previous two meetings in September and October, we felt it was reasonable to take a break. This decision came from both higher short-term proinflationary risks, which resulted in increased current price growth rates in October, and from greater volatility in the financial markets.

The introduction of new restrictive measures, temporary disruption of production and logistics chains, as well as additional costs incurred by businesses to protect their staff and clients from the spread of coronavirus, can put upward pressure on prices. Also, volatility in the global markets and the ruble’s weakening fuelled short-term proinflationary risks. All these factors caused some growth in inflation expectations. This is a short-term perspective.

However, in the medium term, a slowdown in demand recovery caused by the tense epidemiological situation will restrain both economic activity and inflation.

We are taking, and will take this into account when making key rate decisions in future.

With this in mind, we believe that within the baseline scenario (which I will describe a little later) there is room for monetary policy easing as medium-term demand-side disinflationary risks prevail. We emphasised this fact in both cases when we made the decision to maintain the current key rate. At the same time, we must think meticulously about when it is appropriate to use this room, given the highly uncertain forecast for 2021 and the possibility that the situation might develop in a way that differs from the baseline scenario. When monetary policy is within a low interest territory, as it is now, every step means a lot. Looking at other countries' experience, both current and previous, we see how difficult it is to achieve goals when all traditional monetary policy measures are no longer effective. We see how unconventional measures can shatter confidence in economic policy and price stability. We must of course try to avoid this.

Our policy goal is the same — to hold inflation close to 4%. Price stability and predictably low price growth are milestones both for people and businesses that help them make savings, investment decisions, and maintain the purchasing power of savings.

How did the Bank of Russia’s measures in 2020 influence lending?

Corporate lending is growing much faster then in previous years; lower rates and the concessional lending programme called the Programme 6.5 supported mortgage lending growth and even led to the historically highest lending in the primary housing market; unsecured retail lending went up, but not at an alarming rate and without increasing households’ debt burden.

In the first nine months of the year, corporate lending increased by 7.7% (vs 3.7% seen in the same period last year and 4.3% throughout all last year). We understand that there was also an additional demand for short-term loans that came from businesses when their profits were insufficient. Since the beginning of the year, interest rates for loans with more than one-year maturity have fallen from 9.56% to 6.97%.

Mortgage lending rose by 14% this year and, as I have already said, the Government's concessional mortgage programme certainly contributes a lot to this figure. Loans issued under Programme 6.5 account for 31–37% of the last months' mortgages.

With the easing of monetary conditions and the effects of the Programme 6.5 mortgage rates reduced to 7.3% for the whole portfolio that also includes loans other than concessional ones.

Other types of mortgage lending are also expanding, partly due to refinancing, though at a slightly lower rate.

What is also important for public welfare and truly sustainable mortgage lending development, and what we have paid special attention to, is the quality of mortgage loans. It currently remains high. What is more, in a situation where the pandemic could have a negative impact on household incomes, banks took even more conservative approach to issuing new mortgages. Thus, the share of loans with a low down payment (less than 20%) — and such loans are considered risky almost everywhere in the world — fell from 32.2% in 2020 Q1 to 27.6% in 2020 Q2.

There is still potential for further mortgage growth. At the moment, only 10% of households in our country have mortgage loans, while in developed countries this figure is close to 40%. However, it is very important now what will be the basis for further growth.

Why is it important? Concessional mortgages accelerated lending. It has clearly led to higher housing price growth in the primary market. In the end, the benefit of low rates might be wiped out by rising prices. In this case, housing affordability (the increasing of which is the goal of mortgage lending) might stay the same or even shrink, as we have seen, for example, in a number of other countries that faced a mortgage lending boom with the construction lagging behind.

In order not to fall into this trap, we — the Bank of Russia — believe that we should treat the concessional mortgage as any other specialised anti-crisis tool, as a temporary measure that helps to overcome market failure and a temporary drop in demand. It should not replace normal market mechanisms, create a feverish demand and push it above the levels set by the general economic equilibrium, causing an unexpected downturn later.

Will mortgage loans be affordable after the concessional programme ends?

We believe they will. A decline in rates in the economy that follows a key rate reduction also leads to a decrease in mortgage rates. We believe this to be the basis for sustainable growth in the mortgage market. Finally, the mortgage market expansion and rising demand for mortgage loans go hand in hand with higher household incomes and the economic growth itself.

Next, retail lending. As you will recall, in 2018-2019 retail unsecured lending showed outrunning growth. We were worried about the potential increase in household debt burden that could pose risks both to people's well-being and financial stability. We were consistently tightening macroprudential measures aimed at mitigating these risks. In October 2019, as you will recall, we introduced a debt burden ratio. This triggered a market setback, then, in 2020 Q2, amid the pandemic-induced restrictions, made households cautious about their future incomes; banks, too, became more careful when assessing risks of their borrowers. Thus, the number of loan applications dropped by 14%. Still, as early as in 2020 Q3, unsecured lending picked up, though at a slightly slower pace than in the previous couple of years. This growth provides a significant support for consumption and, as a result, to the industries relying on final consumption. The lending expansion became possible thanks to, among other things, a slowdown in consumer lending growth seen in 2019, which kept consumers' debt burden moderate. So, in the first nine months of this year, retail consumer lending increased by 5.9%.

It is important for us today to support lending and at the same time avoid uncontrolled growth in the household debt burden. Otherwise it will be a disservice for borrowers who will not be able to service their debt.

Therefore, we reduced buffers on newly issued mortgage and consumer loans. These buffers depend on the debt burden of the borrower. This measure creates the incentive for banks to prefer borrowers with lower debt burden. In this way, we maintain control over the situation and promote growth in lending.

The ability of banks to increase lending depends not only on interest rates, but also on the restructuring of current loans.

Let me remind you that loans to individuals (excluding individual entrepreneurs) for a total of 802 billion rubles were restructured. This accounts for 4.1% of the total household debt. As for mortgage loans, 3.2% of the debt was restructured. For unsecured consumer loans the figure is 5.2%.

Speaking of lending to large businesses, loans for 5 trillion rubles, or 15.4% of the portfolio were restructured, which is a significant amount. As for small businesses, 15.5% of loans were restructured.

The financial stability policy we have pursued in the previous years makes it possible to avoid higher risks even when such large-scale restructuring takes place. Banks have accumulated enough capital buffers to cover their losses even if a significant share of restructured loans are no longer serviced. We believe though that this share will not be large, and of course we need to keep track of the situation.

The downside of the accommodative monetary policy is the reduction in not only lending rates, but also deposit rates. Currently, the amount of deposits is stable, however, more and more consumers are looking for more profitable ways to invest their money: more than 7.5 million people have brokerage accounts and try their hand at the stock market. In October alone, the number of accounts grew by 736,000.

This is a significant factor in financial change, and it is of concern to us, but not because banks might lose funding. People enter the stock market through brokers, the very same banks, and it is often banks that encourage people to choose investments rather than deposits. Deposits remain attractive because their rates are higher than inflation, so this is the choice for people who value reliability over profitability.

The bottom line is that more and more people are entering the stock market for the first time, and it is important for us to protect their rights. The law on investor classification has been adopted and we are very grateful to the State Duma. The work on the draft was complex and prolonged, and we had many controversial points. Still, it will come into force in 2022, while the explosive growth in the number of retail investors is taking place right now and will continue next year. We should not let people become disappointed in the stock market during this period. We will closely monitor sales practices and information disclosures; however, stronger measures might be required, and we will seek your support in this matter.

In truth, the transfer of savings from bank deposits to the stock market brings some advantages for the economy. Savings provide the foundations for the growth of long-term sources of financing, such as corporate bonds. All this is beneficial for the economy. This does not impede the monetary policy transmission mechanism, which operates through the financial market. Today, we are discussing the monetary policy and we must take the savings flow into account. We believe that this flow does not reduce the efficiency of the transmission mechanism. Rather, it boosts the ability of Russian companies to raise funds through the stock market, meaning that households' funds still work within our economy, now in a more long-term format than bank deposits.

Now I will talk about our forecast, as there is not much time left.

Since the publication of the first version of the Guidelines in September, we have adjusted the forecast taking into account the developments caused by spreading pandemic, as well as the actual data we received for 2020 Q2-Q3. I have to say that the data was slightly better than we expected.

We expect GDP to drop by 4–5% by the end of the year, which is half a percentage point lower than stipulated by our previous forecast.

The recent deterioration of epidemiological situation in Russia and in the world has forced us to somewhat downgrade our short-term economic recovery forecast for the next few quarters. The effects of the pandemic will still be taking their toll early next year, so we have reduced our expectations of GDP growth at the end of 2021 by half a percentage point, that is, to 3–4%. It is also due to the fact that we have updated the forecasting base for 2020.

The economic growth forecast for 2022–2023 remains unchanged — we expect a 2.5–3.5% rebound in 2022, and a 2–3% in 2023. We believe that the current monetary policy will keep inflation at a level of 3.5–4% in 2021, and around 4% in future.

As you can see, these changes in our forecast are mostly related to the near term. Speaking of the scenarios, we present three alternatives in addition to the baseline.

Previously, the discussion of alternative scenarios focused on oil prices (even though we had other assumptions). Now our two-dimensional scenario matrix is based on various assumptions regarding the recovery in demand, the impact of the pandemic on both Russian and global economic potential, and the potential GDP path.

I would like to point out that oil prices are no longer our principal concern, not so much because the pandemic has brought us and the world fundamentally new challenges, but rather because — thanks to the fiscal rule and floating exchange rate of the ruble — oil price fluctuations now have a smaller impact on economic fundamentals. This is an important result of macroeconomic stability policy.

By the way, back last year, during discussion of the Guidelines — and I recall this discussion — deputies suggested that we reduce the role of oil prices in our forecast scenarios. Now we are presenting exactly this type of scenario —one less connected to oil prices.

The baseline scenario assumes that global economic recovery will be slow due to persistent epidemiological risks and general uncertainty. The Russian economy will continue its recovery in 2021, after some slowdown seen in 2020 Q4. The rebound in consumer and investment demand will be promoted by the accommodative monetary policy and the Government’s measures to support people and businesses, taken in 2020. We believe that the economy will return to its pre-crisis state in the first half of 2022, and will stay there throughout the forecast horizon. Monetary policy will remain accommodative in 2021. We think it is possible that higher disinflationary pressure coming from weaker demand in the medium term might require longer or more pronounced easing of the monetary policy than what is assumed by our scenarios, even by this one.

Next, an alternative — the disinflationary scenario — assumes the pandemic will continue and some restrictive measures will stay in place. It will cause the recovery in demand, incomes and investment activity to be slower than in the baseline scenario. Also, the propensity to consume will experience a steady decline. In this scenario we will most likely need to pursue the accommodative monetary policy for the longer period of time than assumed by the baseline scenario.

Next, there is the proinflationary scenario. It assumes the demand dynamics will be the same as in the baseline scenario, however, with a sharp drop in the economic potential. What is also different about this scenario is that it assumes slower budget consolidation. To hold inflation close to the 4% target, we will need to temporarily switch to a moderately tight monetary policy, then gradually return to the neutral policy by the end of the forecast period.

Finally, the risk scenario combines a weak recovery in demand and a significant slump in the economic potential. What is more, the risk scenario considers the possibility of a severe credit crisis in certain countries with high levels of public debt, as well as the possibility of a geopolitical risk aggravation. At the same time, in 2021, risk premiums in global financial markets will rise for a long period of time, and capital outflow will increase. All these events will bring significant proinflationary risks. In this scenario we will need a temporary but strong tightening of the monetary policy with a return to the accommodative policy in the second half of the forecast period. Inflation will stabilise at the target somewhat later than 2023.

We described these four scenarios in detail and discussed them at the working group meetings. To conclude, I would like to emphasise that inflation targeting and the Bank of Russia’s and the Government’s commitment to preserving macroeconomic stability amid the pandemic — which is an unprecedented challenge for our world — show us that our resilience, and the efficiency of key monetary policy tools and the transmission mechanism are sufficient for supporting the economy without creating risks for future development.

Thank you very much for your attention! If you have any questions, I would be happy to answer them now.