Elvira Nabiullina’s interview to Bloomberg

Bank of Russia Governor Elvira Nabiullina talks on forecast inflation and limited room for a key rate reduction in an online interview to Bloomberg.

On inflation

‘We believe that inflation will come in at about 4.5% as of the end of the year. I hope it will not exceed this level. Proinflationary factors are really temporary, in our opinion.’

‘If they prove to be temporary, we expect annual inflation to rise slightly more, largely because of the low base effect. We believe that inflation will reach its peak of about 5% approximately in February. At the moment, we do not assume that annual inflation will exceed 5%. Further on, as annual inflation recorded in March and April 2020, when it hit its highs, is excluded from the calculation base, annual inflation will start to go down. Overall, inflationary pressure will remain low since the economy will not return to its potential, there will be a gap between demand and supply, and we consider that disinflationary risks will prevail.’

‘We assume that inflation will go back to 4% because we expect the economy to rebound. At the moment, we estimate that the economy will recover to its pre-pandemic level in 2022 H1. This implies that disinflationary pressure will weaken towards 2022.’

On inflation expectations

‘We can observe that inflation expectations are rising and may translate into consumer behaviour, pushing up inflation even more. This is a very important factor for us which we will assess at the meeting of the Board of Directors. Unfortunately, inflation expectations may stay elevated.’

‘It is essential to monitor how increased inflation expectations are affecting households’ behaviour, given that loan and deposit rates are low.’

‘People are now seeking alternatives for investment more actively than a year ago, opting for foreign and foreign exchange instruments, which in turn may impact the exchange rate. This sentiment should be closely monitored, including for making proper key rate decisions.’

On December’s key rate decision

‘I would prefer not to make any forecasts now regarding our decision in December. We are really going to discuss all these factors because trends are diverse. On the one hand, these are disinflationary effects due to the worsening epidemiological situation and a range of restrictions. Overall, we can see that they will remain in place next year as well. We can also observe that these short-term factors may have a long-lasting effect, and our task is to carefully explore and assess these factors and the balance of these risks. We will make our decision with account of all this.’

On the IMF’s recommendation to reduce the key rate

‘As to the IMF’s recommendation regarding a possible further key rate reduction below 4%, we are relying on our own models and analysis. The situation may unfold in such a way that we may really need this, yet this will not necessarily be the case.’

‘This is not provided for in our baseline scenario.’

‘Our baseline scenario only assumes limited room for further easing.’

On complex products

Complex products need to be prohibited for selling ‘because the law on qualified and non-qualified investors enters into force with a time lag, while we can observe a large inflow of retail investors in the market already now. I believe that we should discuss the range of such complex products with lawmakers. In my opinion, these should be structured bonds, various structured products used by banks comprising deposits and bonds, and so on, any complex products that people are unable to properly comprehend.’

Authors: Anrey Biryukov and Anna Andrianova

Bloomberg