Speech by Elvira Nabiullina at joint meeting of State Duma committees on Monetary Policy Guidelines for 2025–2027
Good afternoon, dear colleagues.
Thank you for inviting me to speak and for organising such a broad discussion. Today, I will present the draft Monetary Policy Guidelines for the next three years. As Mr Aksakov noted, the working group had an extensive discussion of this document at yesterday's extended meeting. I would like to thank the deputies for their meaningful discussion and comments. We sought to take them into account in the updated guidelines. I realise, however, that many questions have yet to be answered.
We have been forced into beginning a monetary tightening cycle. This marks a new development for the Russian economy. Businesses are concerned about the implications for investment, production capabilities and economic growth – and this is what Alexander Zhukov wants us to focus on. Households are concerned about when we will be able to tame growing prices. I will seek to address these questions in my speech.
First, as a reminder, let me outline the developments since last autumn. Current monthly inflation, in terms of most of the underlying components of inflation, peaked at
In the spring, however, the downward movement of inflation not only paused but reversed, and we have seen a renewed, considerable, acceleration since May. Unfortunately, in recent months, almost every new batch of data has suggested renewed inflationary pressures. In response, we raised the key rate by a further five percentage points in total in July, September and October.
What has happened? Unfortunately, all the triggers for a rate rise were present. In March, these triggers were identified as signals of strengthening inflation.
First, core inflation and the inflation expectations of both households and businesses were up.
Second, we saw no signs of cooling in consumer activity. The rapid growth of incomes was strengthened by intense lending, which was supported by this increase in income and the subsidised programmes.
Third, labour shortages were becoming more severe across all industries. According to yesterday’s data, unemployment was down to 2.5% by the middle of the year, and even to 2.4% on a seasonally adjusted basis. It has been at a record low for several months. This means that the physical capabilities to quickly ramp up production are extremely limited.
Finally, a further driver of inflation is higher sanctions pressure creating new difficulties with external payments. That is, risks related to external conditions have materialised. Their contribution to inflation has been twofold: either through increasingly less availability of imports or through rising costs for imports as the logistics have become more complicated and payment fees have risen.
Signs of slower growth in output, i.e., economic growth, emerged in the third quarter. So far, this slowdown has been a reflection of supply-side constraints rather than a cooling in excessive demand. Specifically, it is staff shortages and a reduction of production capabilities, which might otherwise be relied upon to expand output.
The resulting indicator of all these processes is high, sticky inflation, which signals a wide gap between demand and the production capabilities of the economy. A further impact is made by the substantial rise in the recycling fee and the more sizeable than expected indexation of utility rates.
These trends are unfolding over a background of already-high inflation. We estimate its full-year value to total
Our baseline scenario suggests that annual inflation will exceed the target of
Within this context, I would like to focus on two concerns. In fact, they are mutually exclusive concerns, but they arise equally often and sometimes simultaneously. The first concern is that the high interest rate will fail to deliver at all, which follows from data on persistently rising lending. The second is that the high key rate will completely arrest lending and push the economy into a sharp downturn. They are both incorrect. In the context of the argument about a pause in lending, we are increasingly often hearing suggestions that it does not make any sense to reduce inflation to 4%. Look no further than the solid growth [in the recent past] with
Let me discuss these three issues at length, beginning with the last one of why inflation need be reduced if economic growth is so good, while high rates may dent it.
As a refresher, inflation is a direct deduction from household incomes. Wages and incomes are not growing across the board. They are marked by a wide spread, and that is a reflection of the structural changes in the economy. It is imperative to prevent an acceleration of inflation, considering that inflation affects people whose incomes are not growing or are growing insignificantly.
Businesses suffer from high inflation no less than households since rising costs are in many ways a manifestation of inflation. This is a reflection of intense struggle between companies for increasingly scarce production resources such as labour, materials and new equipment. It is only businesses producing goods that people must buy regardless of price that benefit from inflation. Such businesses retain their margins, but at a cost to households. For all the rest, inflation represents a huge factor of uncertainty about future financial results.
High inflation thwarts sustainable economic growth. Rapid growth will give way to a downturn, leaving total growth insignificant, if there is any – and this is unlikely to suit anyone. This is clear from the examples of multiple countries and our history.
I would like to emphasise that high inflation is also unpredictable inflation: it is a dangerous illusion that elevated inflation can be kept within a certain range.
Therefore, we do not intend to make any concessions to reach our goal. We believe that 4% is the maximum of what can be considered price stability. Inflation has been higher than this for a fourth consecutive year. While this was somewhat inevitable in 2022 and 2023, at this time, it cannot be accounted for by sanctions and economic transformation. It is precisely the result of supply lagging behind demand. We can remove this imbalance.
Now, I will move on to the efficiency of the key rate. It is having an impact, as it did before, and the mechanism of its impact on inflation remains unchanged. However, its effects are blurred by other impactful factors, which ultimately requires a change in the key rate of a larger magnitude to achieve the desired result.
Already between July and August, we can see a considerable slowdown in the growth of retail lending, and rates of growth are increasingly more balanced. Certainly, this has been driven not only by our monetary policy but also by the rollback of universal subsidised mortgages, as well as our consistent tightening of measures against excessive household debt in consumer lending, for which we are using macroprudential regulation instruments.
Conversely, corporate lending is continuing to grow rapidly. It gained 1.6 trillion rubles in August, and the same amount in September, and 10.6 trillion rubles over the first nine months of this year. The annualised growth rates are very high and are nearing 22%. Clearly, the picture varies across sectors, but loan portfolios are expanding across all aggregated sectors. This fully refutes the popular argument that credit is no longer accessible to businesses and that the rate is prohibitive. Doubtless, it has not been prohibitive for the first nine months of this year.
However, this is not to say that corporate lending has become insensitive to monetary policy. Rather, what we have seen is growth in the weight of factors that act as a counterweight to the high key rate.
Among these are, first, the high profits of companies in the real sector. They totalled over ₽33 trillion in 2023 and ₽20 trillion over the first eight months of this year, and this is a very solid resource for investment. Thanks to these profits, companies can even afford costly loans as an additional lever for development.
The second counterbalance is high inflation and inflation expectations. Simply put, companies expect that inflation will partially offset interest rates.
Third, in corporate lending, we have seen a rising proportion of segments that are weakly sensitive to the key rate. I mean subsidised lending programmes, project financing, and the need to complete investment projects which are nearing completion.
All of this works to weaken the impact of monetary policy on corporate lending but does not nullify it. Had we not increased the rate to 16% [at the time], we would have seen much more explosive growth in both corporate and retail lending, as well as overheating demand and all the entailing consequences for inflation, and I assure you that inflation would have been much higher. The key rate proved sufficient to stamp out further inflationary pressures. However, a return to low inflation requires tighter monetary policy.
Now on to the concerns about the rapid descent of overheating into excessive cooling, which is a cause for concern for many. These concerns are greatly exaggerated. I suggest looking at the broad picture and from different angles.
To begin with, profit and shareholders’ money, rather than credit, have always been and will remain the main source of financing for investment. A substantial share of companies does not have to bear interest costs at all and rely solely on their own capital for development. Our analysis shows that they account for about one third of input costs in the economy. They are usually very efficient companies with impressive capital returns. For them, as well as for those with little debt, a period of high rates is an opportunity to increase their market share at the expense of more debt-laden and less efficient companies.
That is not to say that those less efficient and over-indebted companies will have to close, as they threaten us. We are closely monitoring the financial standing of companies, and we can see that most are quite stable and in good shape. However, tight monetary policy facilitates the transfer of resources to the companies whose products are most in demand, with the best capital returns and labour productivity that is rising faster. At the moment, the only way forward is to increase labour productivity in order to overcome the current skills shortages. The skills shortages, rather than the cost of credit or even capacity shortages, are currently the most important barrier to economic growth, according to businesses themselves.
But things are also far from perfect with production facilities. A number of industries report an absence of available, even if outdated, equipment. This is true of mechanical engineering, given its very high demand. This is spurring investment in the engineering complex, and investment has grown significantly. In any case, it takes time to upgrade and expand production assets.
What happens if everyone has cheap credit to buy machines at the same time? It will be impossible to produce more machines due to labour shortages. This will send the prices for these machines higher, feeding through to inflation and cutting project margins. Under a tight monetary policy and a more balanced growth in lending, the funds needed for development will go towards projects that are critical to easing the bottlenecks. This is the only way to expect production to have the time to catch up with the higher demand. Otherwise, instead of accelerated growth, we will end up with spiralling inflation.
You could ask: what is the solution? Can we expect production capacity to grow when investment is not growing? Overall, investment in the economy has grown considerably over the past two and a half years, specifically by more than one fourth compared to 2021. It is not projected to go down, and maintaining investment at least at about its current level will incentivise the expansion of production capabilities. These capabilities are determined by the amount of machinery, equipment and transport infrastructure. Current investment is much higher than in 2021, and production capabilities are set to grow higher. This means that economic potential is still on an upward trajectory and will grow in
Please note that, while we have significantly raised the key rate path in our forecast, the growth outlook is unchanged. We still expect growth to continue, albeit at a more measured pace than it is today.
It is only the least probable ‘Risk’ scenario that assumes a downturn. The trigger [in that scenario] is a global crisis rather than overly tight monetary policy.
I am aware of your concerns about the difference between the baseline scenarios in the Bank of Russia's and the Government's forecasts, and we have discussed that. The Government’s forecast assumes stronger economic growth, and the draft budget is premised on this. We do not rule out that growth next year will be strong, and this is the assumption of one of the forecast scenarios, namely the ‘Above Potential’ scenario, which is close to the Government's baseline scenario for
In addition to the baseline scenario, we have three alternative forecasts. I have mentioned the two of them: ‘Above Potential’ and ‘Risky’. The third is ‘Pro-inflation’. It assumes an expansion in subsidised lending programmes. This scenario is special due to the clear temptation to expand subsidised lending in response to the tightening of monetary policy.
We are confident that it will not be possible to increase production by means of low loan rates. This can be done only when the economy has available resources. As you remember, that is what we did during the pandemic. However, if the available resources – manpower, equipment and transport capacities – are scarce, as they are today, cheap funding will bring nothing but strong competition for them, as I have mentioned, as well as rising prices for both food and final goods. Therefore, the ‘Pro-inflation’ scenario assumes higher inflation, a higher key rate and lower growth. However, our goal is to make moderate interest rates broadly available, and not only to those entitled to benefits. The fewer subsidised loans, the sooner we will reach this goal.
In our opinion, now is the best time to think about a more flexible system of government support. We are in intense discussions with the Government about this system. It should not be limited primarily to subsidised lending. I understand that subsidised loans have become the order of the day for businesses and ministries. However, another source to raise financing is by placing shares. It is less common, and this is also a result of the Government’s focus on lending.
Meanwhile, the capital market has important advantages. Among them is essentially open-ended funding, which does not lead to an increase in corporate debt burdens, higher inflation, or a higher burden on the budget when monetary policy is tightened. We believe it would make sense if companies had a choice in receiving support: subsidised loans or tax privileges when placing shares on the stock exchange. From a macroeconomics standpoint, as I have said, this is much more efficient. It does not involve an increase in budget expenditures – and that is not what we are discussing. It is not about increasing budget expenditures but about reallocating funds between various support instruments. As I have said, we are in intense discussions on this subject with the Government.
Overall, tight monetary policy is not a whim of the central bank. It is an inevitable response to economic developments. In current conditions, the economy, including both the state and private businesses, should allocate these resources to priority areas, and to those who can manage them in the most prudent way. This involves the need for a solution to the long-standing problems of efficiency and productivity and a review of the list of high-potential projects. That is why this period is tough.
However, we believe that it will pay off. Many countries went through this before they reached sustainably low inflation and its advantages, which include affordable commercial mortgages and affordable loans for businesses. In our conditions, tight monetary policy is consistent with all the objectives for economic development that the Government is currently working on. The policy works to ensure that these efforts do not go down the drain or boost inflation and instead lead to economic growth. The policy protects wages, pensions, social benefits and savings against price increases.
Thank you all for your attention. I can now take questions.