Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 10 June 2022
Good afternoon! Today, we have made the decision to decrease the key rate by 150 basis points to 9.5% per annum.
Inflation is slowing down, including owing to a stronger ruble and lower inflation expectations. This made it possible to cut the key rate again today. However, the very low price growth rates we have been observing in recent weeks cannot be considered to be steadily low inflation. They are mostly associated with a downward adjustment of prices after the surge in March. Moreover, proinflationary risks are still considerable.
I would now dwell on the factors behind our today’s decision.
First. Price growth significantly decelerated in May—early June.
However, we are not too optimistic about this fact. Indeed, prices in a small group of products (making approximately 10% of the consumer basket) did not simply rise more slowly in May, but even declined. These were mostly food products generally characterised by elevated price volatility (certain fruits and vegetables, eggs, and sugar). Prices for durable goods edged down as well, although they had been growing at a double digit pace until just recently. Speaking of the absolute majority of products, prices are still considerably above 4% in annualised terms, despite their slower rise.
In February—March, households stocked up with goods and non-perishable foods for several months ahead. People are using them gradually, due to which are probably buying less currently. Furthermore, businesses notably raised prices, fearing a weakening of the ruble, among other things. Today, when the situation has stabilised, not all people are ready to purchase goods at such prices. Hence, prices are adjusting downwards. Nonetheless, the situation might reverse. Stocks will run out, and people will consume by making new purchases.
I would like to emphasise that the decline in prices for certain goods in April—May offset their surge in March only partially. Specifically, prices for computers, TV sets, washing machines, and smartphones dropped by
An important sign of a stabilising situation is that households’ inflation expectations are returning to the levels of the previous year. Answering the question about the reasons for lower inflation expectations, people noted that ‘the strong wave of price growth has already passed’ and a deficit of fast-moving consumer goods has been prevented.
Companies’ price expectations also continued to decrease, returning to the level of the end of 2021. Among the reasons, businesses mention both a slower rise in costs, including due to exchange rate movements and lower prices for motor fuel, and a weaker demand for their products. However, enterprises’ and households’ expectations are still notably above the levels observed when inflation was close to 4%.
Considering these trends, we decreased our inflation forecast for 2022. We estimate that price growth will equal
Second. According to our assessment, the decline in economic activity discontinued in May. Speaking of external trade, export quantities contracted less than we expected in April, whereas import trends were generally in line with our estimates. Today, most companies engaged in external trade are facing problems. These bottlenecks are associated with establishing relations with new suppliers, making payments, searching new target markets, and delivering goods via new routes. Debottlenecking will take a long time. Moreover, there are still risks of secondary sanctions.
Economic trends across industries are still diverse. Heterogeneity has increased. On the one hand, we can see local improvements, according to recent figures, including survey results. In particular, the Business Climate Index we started publishing in June shows that companies have been expressing less negative estimates of the current and future economic situation for two consecutive months. Enterprises in those industries where import substitution processes are more active report more notable improvements, for instance, in pharmaceuticals, certain machine building sectors, and metal processing. The situation in agriculture is generally stable. On the other hand, those industries where external trade plays a key role record a contraction of output. These are export-oriented companies (namely, the oil and gas sector, wood processing, and coal mining) and enterprises critically dependent on imported equipment and components (including car makers and other assembly plants). Another bottleneck is enterprises’ dependence on the maintenance of foreign production lines, machinery, and other equipment.
Heterogeneity is high across both industries and regions. Specifically, a considerable number of companies in the North-West are traditionally focused on European markets and, therefore, face a more significant decline. Contrastingly, those regions that supply their goods mostly to Asia are adapting to the new environment more quickly. The downturn in the agroindustrial and tourism regions in the South of Russia was also not as intense because they have a large share of small and medium-sized businesses and are rather focusing on the domestic market. We always take into account the latest data received from Russian regions when we prepare our decision. I would like to remind you that, before the quite period, we release the report Regional Economy. This review has been published for 18 months already and provides assessments of the situation in Russian regions prepared by the Bank of Russia Main Branches.
Speaking of consumer activity, we could see that it weakened in April—May. Retail turnover declined by nearly 10% year-on-year. There are at least three reasons for this reduction. Firstly, demand adjusted downwards after soaring in late February—early March. Secondly, households’ savings in the last three months were driven by high deposit rates. Thirdly, the growth of consumer lending slowed down. This could be associated with both high interest rates and the fact that people had mostly made large purchases that often require such loans (household appliances and electronic devices) earlier.
We believe that now these factors start to reverse. The overall stabilisation of the situation and better expectations about economic prospects will support consumers’ confidence. The expansion of social support programmes and the indexation of pensions that have already been included in the budget will also revive consumer activity. As households use their stocks, consumption will start to return to its usual levels.
Unemployment remained record low in April. However, during the last month, increasingly more companies started to introduce part-time employment schemes. Some indicators show that the demand for a range of specialists is declining somewhat. Further trends in the labour market will depend on the scale and pace of the structural transformation and the mobility of workforce.
Third. Monetary conditions eased in some segments, but remained tight overall.
According to high-frequency indicators, the growth in lending, especially in the retail segment, slowed down in May. Nonetheless, there are grounds to believe that the key rate decrease in May will support lending already beginning from June. The yield curve of federal government bonds declined to 9% across almost all maturities. Banks are also revising their credit rates downwards. However, due to high economic uncertainty, elevated non-price requirements for borrowers remain an additional factor of the tightness of credit conditions. When making a decision on the level of the key rate, we take into account the impact of this factor on credit activity and monetary policy transmission. We will also continue to closely monitor trends in time deposits and how they will change after the deposits opened at high interest rates in March and April mature.
I will now speak of possible risks to our forecast. Proinflationary risks continue to go down, while still remaining considerable.
Fiscal policy is becoming expansionary. We factored this in when making our recent decisions. If fiscal policy is eased further, proinflationary pressure might turn out to be stronger than predicted in the forecast. To bring inflation back to the target in 2024, we might need to pursue a tighter monetary policy than we assume today. After the Government approves decisions on the fiscal rule for the next three years, we will be able to assess more accurately the medium-term impact of fiscal policy on the economy and inflation.
Proinflationary risks also include supply-side risks, in our opinion. This is primarily related to manufacturers that are strongly dependent on imports. They are facing unprecedented challenges as they need to rearrange their technological, production, and logistics chains. Without this, they will not be able to replenish the stocks needed for the economy. First and foremost, I mean non-food goods. If the stocks diminish and their replenishment remains difficult, this will limit production capacities and might exacerbate inflationary pressure.
External conditions involve a whole range of risks. The combination of these conditions and their development over time will determine their overall effect on the economy and inflation. These are the major factors of uncertainty. Firstly, the impact of the oil embargo. If Russian oil exports plummet, this will provoke proinflationary pressure due to a contraction of the balance of trade and a weaker ruble. A lot will depend on how much oil the country will be able to redirect to other markets, as well as the extent to which the slump in oil exports will be offset by the price. This in turn will depend on the elimination of infrastructure and logistics problems and the demand for oil in new target markets.
Secondly, the risks of a global recession are growing. If they materialise, the global demand for Russian exports will decrease, which will accelerate inflation through a weaker ruble.
Thirdly, a contraction of Russian exports might also involve disinflationary risks if companies are forced to redirect their products to the domestic market because of the impossibility to establish export chains.
Fourthly, a key factor will be trends in imports, specifically how quickly the volume of imports will restore and how it will correlate with export quantities.
As you can see, external conditions involve a very large number of possible factors that might have diverse influence. We will assess all changes and the mutual effects of these processes.
Winding up, I would like to comment on monetary policy prospects in the conditions of unprecedented uncertainty.
We need to adjust our policy as follows. On the one hand, it should not hinder the structural transformation of the economy. On the other hand, we need to avoid stagflation risks. In the first case, we might face a problem if the level of the key rate is too high in a situation where demand contracts more considerably than supply. In the second case, a problem might arise if the key rate is too low when companies lack real opportunities to ramp up supply and if we reduce the key rate too quickly and thus the response to price dynamics observed today is excessive.
If the situation develops in line with the baseline forecast, we will gradually decrease the key rate further as steady inflation slows down. We will consider the necessity of a further key rate reduction at our upcoming meetings. The time and the size of the reduction will largely depend on the pace of a decrease in households’ and businesses’ inflation expectations, as well as on how companies will rearrange their production chains in the new conditions and how successfully they will address supply-side constraints.
According to the updated forecast and our today’s decision, the average key rate will equal
Thank you for attention.
Q&A for the Media
QUESTION from Interfax:
As you have already said, current price growth rates cannot be considered steady. Do you expect the inflation trend to reverse as one-off factors are exhausted and because of possible effects of fiscal policy? This is my first question.
And the second question, please. Previously, you said that you would be able to return to the standard pace in terms of monetary policy when the key rate reaches a single-digit level. Have we returned to it by today? Is it possible to talk of fine-tuning already now?
One more question, if I may. You have spoken of the embargo on exports. How strongly will it impact the balance of trade? Do you share the opinion that price growth will help offset this effect?
ELVIRA NABIULLINA:
As regards a slowdown in price growth, we expect it to continue. Indeed, the influence of one-off factors will be diminishing. However, we expect that steady components will continue to go down alike (currently they are declining, while still staying above 4%).
You are certainly right saying that a further implementation of fiscal policy will be one of the contributors. At the moment, we rely on the decisions that have already been approved or announced. The budget for the next few years is currently under discussion. We consider it essential to later on return to a certain fiscal rule and comprehend what bounds of the budget will be set as this influences our monetary policy.
As to the shift towards the standard pace, I have said rather that when the key rate is in a double-digit range, such a standard pace as 0.25 percentage points seems to be inappropriate and we are thus moving at a greater pace.
When we reach a single-digit level of the key rate, we will consider this issue each time. The size of a step will depend on the scale of the adjustment of our forecast for the future.
Today, the situation is uncertain and a lot is changing quickly. Hence, it seems to be impossible to predict this pace each time.
It would be rather possible to talk of the standard pace when we are in the mode of such fine-tuning.
As regards the impact of the embargo on oil and petroleum products, it does exist and it is negative. However, the extent of this influence will depend on multiple factors, including, of course, the price factor. In other words, this effect will depend, in the first place, on whether and how successfully we will be able to redirect the flows from those countries that have imposed the embargo to other markets.
Secondly, this impact will depend on the price factor which in turn is affected by the situation in the global market in general and the growth of the world economy. As we can see now, it is slowing down. The demand for Russian exports might be declining. Other factors certainly include price conditions associated with discounts and so on.
These are apparently the main factors. We will monitor how this situation will be unfolding.
QUESTION from Izvestia:
I also have two questions, if I may. The first one is as follows. The current situation is far from being standard. The spread between inflation and the key rate is very wide, just as between the key rate and banks’ interest rates.
You have said that the decrease in May might slightly speed up lending already in June. Can you say when you generally expect lending to revive and these spreads between the key rate and banks’ interest rates to contract?
My second question is related to the first one, is urgent, and concerns foreign currency. Today, the Central Bank announced that it would study the issue of bank fees.
However, it is clear that this issue concerns only one bank that extends this to earlier contracts, that is, they are using there a tricky scheme when they transfer money via an accumulation account to an ordinary account, while it is impossible to withdraw the money. They thus say that if you want you may withdraw the money or we may transfer the money, whereas there is no chance to withdraw. Actually, these people are caught in a kind of trap. Can you take any measures of conduct supervision and other supervision in relation to this bank?
ELVIRA NABIULLINA:
As regards a wider spread between credit rates and the key rate now, this is certainly true. This is what we call a tightening of price lending conditions. Banks might also toughen non-price lending conditions when they increase requirements for collateral and so on and so forth.
Price lending conditions reflect a rise in risks and banks’ assessments of borrowers’ risks. It is one thing to lend to an enterprise that has clear and established target markets and it is well known where it buys components, raw materials, and machines. Currently, many enterprises are rearranging their supply chains and there is uncertainty about target markets. Hence, these risks have naturally risen of course, and banks are assessing them.
Why are they doing so? This is risk management. Among other things, banks should think of another part of their clients — depositors and of the fact that funds should be repaid. Depositors’ and creditors’ interests should be protected.
Maybe Mr Zabotkin would like to add something in this regard, including about the spread between the key rate and inflation.
ALEXEY ZABOTKIN:
Speaking of an additional risk premium, I would like to reiterate what has already been said in the statement. We are aware that risk premiums have increased and that non-price lending conditions have tightened, and we take these factors into account when assessing the transmission of our key rate to credit rates and, ultimately, to monetary conditions.
We hope that this will be gradually returning to the previous state, but currently we choose the level of the key rate realising that these risk premiums will stay elevated for a certain period.
As regards the difference between inflation and the key rate, the question is what inflation you imply. Talking of annual inflation for the past 12 months, the difference is substantial of course, to be honest. According to recent weekly data, inflation in the country is 17.1%. Today, we cut the key rate to 9.5%.
However, the reason is that this inflation level refers to the previous change. A similar situation, although it could be less notable, was recorded, if you remember, in 2015 when we reduced the key rate while annual inflation stayed high because its level included significant price rises of late 2014—early 2015.
But what really matters for monetary conditions and monetary policy transmission is not inflation over the past period, but inflation expected in the future.
In this context, if we compare the current level of the key rate with our forecast of inflation, our current stance is generally in line with what can be called a tight or moderately tight policy.
ELVIRA NABIULLINA:
This is true, but I would like to emphasise that this spread is perceived differently. Some consider that the key rate is significantly below inflation, if it is measured in annualised terms. Contrastingly, extrapolating and analysing the current, weekly inflation level, others believe that the key rate is above inflation.
However, we hold that it is impossible to make any conclusions relying on weekly inflation which is largely driven by current factors. The approach mentioned by Mr Zabotkin seems to be more appropriate: the key rate influences the cost of credit or the attractiveness of deposits in the future. Of course, it is necessary to monitor and compare the rates with forecasts and expectations and with how they will affect the future situation.
This is related to both foreign currency and bank fees. Indeed, we are closely monitoring this situation now. As have been said already, we assume that banks should not deteriorate their terms of services for existing clients under earlier signed contracts.
As regards deposits, I would like to stress once again that bank fees may not be increased or introduced. This would be a direct violation of the law.
Speaking of accounts and various types of transfers, this should be analysed based on particular agreements. Various banks made different decisions. We will dig into this situation in every bank and, if any violations are detected in this regard, we will take relevant measures that we are entitled to apply in the case of such violations.
Nonetheless, it is clear that any foreign currency transactions amid the sanctions involve certain risks for both banks and households. Therefore, banks are seeking to reduce the amounts of foreign currency transactions and may even discontinue to offer some products denominated in foreign currency.
However, it is essential for banks to respect all rights of their clients in this case. We are monitoring this situation thoroughly and will analyse it in detail for each bank individually to find out whether they comply with laws and their contracts with the clients.
QUESTION from RIA Novosti:
Ms Nabiullina, today, you have mentioned stagflation and even listed the factors that might cause it.
Do you assess the risk of stagflation in Russia as high and do you take it into account in the baseline scenario, or is it rather a pessimistic forecast? This is my first question.
My second question is about the fiscal rule. Today, you have also referred to fiscal policy. As we know, the Ministry of Finance is now developing new fiscal rules. Do you take part in the discussion of this framework and what should be a new fiscal rule in your opinion?
ELVIRA NABIULLINA:
As regards the risk of stagflation, we do not take it into account in our baseline forecast, and our policy is aiming to prevent the materialisation of this risk. This is our assumption.
Speaking of the fiscal rule, indeed, we do have some joint discussions with the Ministry of Finance about the necessity to use the fiscal rule. However, it is too early to talk of any particular proposals with respect to this framework.
QUESTION from Ostrov Svobody (Volgograd):
Following the key rate reduction, credit rates are going down as well. However, banks are reluctant to issue loans having tightened the assessment of borrowers. How lawful is this and when will banks ease their strict requirements for borrowers?
ELVIRA NABIULLINA:
Thank you for your question. Indeed, we have already discussed this issue several times today as this is a critical factor. We can see that banks have toughened their non-price requirements for borrowers as well.
Banks are really more cautious in their assessments of borrowers, which is because credit risks have really increased. Considering the transformation of the economy, banks need time to assess these risks.
I would like to remind you that if a borrower becomes insolvent, this should not affect depositors and creditors as a consequence because the bank is responsible for their funds.
However, we set the key rate considering this additional tightening of non-price conditions.
I believe that as the structural transformation of the economy progresses and companies arrange new logistics and technological chains, banks’ assessment of these risks will decrease and, accordingly, they will ease their requirements for borrowers.
QUESTION from Frank Media:
My first question is about the National Settlement Depository (NRD). In early June, the European Union enacted sanctions against the NRD and thus, if it is possible to say so, legalised the freezing of the assets and transactions that had occurred after the collapse of the bridge between the Russian and foreign depositories in early March.
However, there had been no ban as such on transactions, settlements and holding assets from early March until the imposition of the sanctions, due to which some investors, including both foreign and Russian ones, are now preparing legal claims to challenge this freezing of transactions.
Is the Bank of Russia planning to be engaged in these lawsuits or to challenge the freezing of transactions for Russian investors in any other way?
Being the megaregulator and a shareholder of the Moscow Exchange Group, is the Bank of Russia planning to challenge the sanctions against the NRD in general or maybe to settle the issue of restoring the depository relationships between Euroclear, Clearstream and the Russian infrastructure in any other way? This is the first group of questions.
The second one is about the form of reporting. Financial market participants have requested the Bank of Russia to revise the approach to disclosing financial information, including according to the IFRS. Is the Bank of Russia planning to change these approaches or maybe to implement certain regulations, including for the banking sector?
ELVIRA NABIULLINA:
As regards the second question, I can briefly answer straight away that this issue is currently under discussion. We will consider what needs to be done in this respect and what we can do.
Speaking of the issues related to the NRD, all restrictions on sales resulted from the international accounting systems’ restrictions on transactions in the NRD’s accounts and prohibition to transfer securities from the NRD’s accounts to other accounting institutions’ accounts.
These restrictions are related to the possibility to sell these securities in the exchange market as it is essential to avoid the risk of buying these securities by investors and often by non-qualified investors who are unaware of potential implications of this freezing because this problem remains systemic.
It is critical to ensure that a seller trying to sell these securities through the exchange infrastructure is unable to sell them to a rather large group of non-qualified investors that have entered the market.
Nevertheless, it is possible to sell securities in the over-the-counter market, certainly if agreed upon between the parties, with discounts, and so on.
As to our participation in various processes and the preparation of legal claims, we do carry out this work to develop an optimal strategy and tactics. This is quite challenging, complicated work. Probably, this is everything that I have to say right now regarding this topic.
QUESTION from the Life and Invest project:
You have already started to talk of investors, and I would like to ask you about the Central Bank’s current policy to protect investors considering that, as it has already been said, investors’ foreign assets were frozen and some investors faced margin calls after this freezing as brokers refused to accept them as collateral.
People are loosing tax privileges when they transfer securities from one broker to another. Speaking of the transfer of individual investment accounts (IIAs), sanctioned brokers have faced a situation when people get two IIAs and the tax service refuses already now to grant tax deductions to people, which will entail fines and rejections for them.
There is yet a lot more issues facing investors today. Is the Central Bank addressing these problems and, if yes, in what way? Are there any specific decisions on these issues made by the moment?
And the second question, if I may. Could you please explain whether Russia is currently able to service its external liabilities? If Russia lacks this opportunity in the future, what will the default on external debt mean for Russian people in general, including for investors?
ELVIRA NABIULLINA:
As regards the protection of investors’ rights, this is a priority of our policy. As you know, before the foreign restrictions were imposed, we had been implementing measures to protect non-qualified investors, in the first place, that were often not welcomed by financial market participants. Of course, many investors are facing various problems now, a part of which you have mentioned.
Each of these problems is considered separately. Some of them require changes to laws, others — new regulations. We are certainly studying all these problems and are going to hold a meeting of our Expert Board at the Central Bank in the near future to discuss retail investors’ problems and sort out the problems we need to consider so as not to overlook anything.
Answering your question about IIAs, indeed, there are brokers who were sanctioned. The Bank of Russia holds that tax deductions should be preserved in this case. To this end, we will need amendments to laws. It is necessary to allow investors to hold two IIAs if one of them was blocked and the other one was not and, accordingly, to preserve their right for a tax deduction.
We believe it essential to introduce such changes to laws.
As regards servicing external debt, as you know, a default is often defined as a borrower’s inability or unwillingness to repay debt. In terms of financial resources, we are definitely able to repay our debt.
We are ready to do it as well. As you know, the Ministry of Finance has demonstrated multiple options. The situation that Russia has faced is associated with technical difficulties to repay its sovereign debt in foreign currency amid the restrictions on international banking operations that are currently in place.
Usually, when a country has any troubles with the repayment of its sovereign debt, they are due to problems with its budget, whereas we do not have such issues. I would like to stress once again that we do have all necessary resources to repay out debt.
What are possible implications? Normally, when a country is unable to repay its sovereign debt, this causes an outflow of investors and, accordingly, a decrease in the value of its assets. However, this has already occurred for Russia and, therefore, we do not expect such an immediate consequence.
I would like to emphasise that this entire situation definitely has no impact on how the government fulfils its obligations to Russian people, Russian residents who hold federal government bonds.
QUESTION from Russia 24 TV channel:
Ms Nabiullina, I have two questions. The first one is about the situation with foreign shares. You have partially commented on this, but still many investors are now wondering why the Central Bank who is the one to protect investors did not warn equity holders of a possible blocking of the shares in brokerage accounts. Did you have such an opportunity in general?
My second question is about the future of Mikhail Zadornov. What will be his career after the merger of Bank Otkritie and VTB?
ELVIRA NABIULLINA:
As regards foreign shares, it was probably almost impossible to warn of the sanctions that could be imposed. The Central Bank has always reminded of the risks associated with investment in foreign securities and of various regulatory risks related to foreign shares. We have always spoken of this.
However, today, it is essential to consider how we can address the problems that investors have faced in the current situation and we will certainly carry out extensive work in this regard jointly with market participants.
As to Mikhail Zadornov’s career, this is the question for him.
QUESTION from TASS Agency:
I would like to return to foreign currency accounts. Have you discussed the introduction of negative interest rates on foreign currency accounts and do you have an understanding of what currency this can be? Back in 2019, a possible introduction of a negative interest rate was discussed in relation to euro accounts. In particular, can there be any limits for which such negative rates might be set? This is about legal entities.
As to individuals, your assurance that there will be no forced conversion of foreign currency accounts into ruble accounts in Russia would be very much welcome.
ELVIRA NABIULLINA:
Speaking of negative interest rates on foreign currency accounts, indeed, the possibility of such legislative changes is currently under discussion, but this is applicable only to legal entities.
As to the conversion, we are not talking of any forced conversions.
QUESTION from AiF Orenburg:
Do you believe it normal when there are some tricky attempts to circumvent the key rate by developing some parallel instruments? I am referring to, for instance, industrial mortgages at an interest rate that is significantly lower than the key rate and some agricultural projects at a considerably lower interest rate. We are not talking of the housing mortgage programme that has been in place for a long time already.
Don’t you see any inconsistency in this regard as it is something like ‘credit is expensive but can be cheaper’? Would not it be more reasonable to find a consensus and ultimately establish such an interest rate thatwould not require inventing any industrial, agricultural and other mortgage rates?
ELVIRA NABIULLINA:
Indeed, there is such a topic. You are totally right saying that these subsidised programmes impact interest rates for other borrowers in general.
Nevertheless, we believe that such subsidised programmes (in both housing mortgage and other industries) can be demanded and they are appropriate as anti-crisis measures during a rather acute period of a crisis when monetary policy is tightened significantly. When we raised the key rate considerably, these programmes were targeted measures taken by the Government that implements structural policy, industrial policy in order to support certain sectors of the economy.
However, when the amounts of such subsidised lending grow, this definitely causes the following effects: some types of loans become less sensitive to the key rate, that is, to monetary policy.
Therefore, we have to maintain the key rate at a slightly higher level in order to achieve the same results, so to say. All else being equal, this implies higher interest rates for all other borrowers. Hence, we believe that it is necessary and reasonable to use such subsidised programmes only during certain limited periods and in limited amounts.
Later on, they should be abandoned in order to have more opportunities to reduce interest rates for all borrowers.
QUESTION from Kommersant:
As this is a press conference on the key rate, I would like to ask a question about it for the sake of variety. First of all, what options did the Bank of Russia consider today? This is a common question that is generally asked by someone else, but it will definitely be asked, so let it be my question.
My main questions are about the forecast. Firstly, the forecast actually changed over May. In this regard, could you please comment on the components in GDP and inflation that turned out to be unmeasurable over this month. In this regard, could you please also give a comment on the balance of payments.
My second question is probably to Mr Zabotkin. Apparently, inflationary pressure associated with the exhaustion of stocks in the industrial sector will be gradually intensifying, probably closer to autumn, but will we actually see this in the path of the inflation rate or will it be offset by other trends?
ELVIRA NABIULLINA:
When preparing our decisions, we considered quite a large set of options, with the key rate ranging from 9% to 11%, let’s say. However, the discussion was mostly about 9.5% and 10%.
Speaking of the forecast, indeed, we have revised our estimates for many indicators. We will present the entire updated forecast by July when we have our core meeting. Our current adjustments are only for inflation and the key rate. Of course, we can see that some processes in the economy differ from the trends we expected in April when we prepared our forecast. As I have already said, this is mostly related to exports, that is, the performance in exports is better than expected, including in terms of the balance of payment, whereas the level of imports is approximately the same as we predicted.
These seem to be the key aspects. A decline in credit activity was also expected, but we hope that it will be gradually reviving. We will monitor how this situation will be unfolding.
I would like to ask Mr Zabotkin to additionally comment on this question and to answer the question you addressed to him.
ALEXEY ZABOTKIN:
As regards the revised forecast, the adjustment was indeed considerable. It was associated exactly with the change in the inflation path, or to be more precise — price growth rates, that has been observed from the second half of April until now. In your question, you have actually given the answer to it. This is really because an important contributor that significantly supported the dynamics of the balance of payments was the fact that exports had not, so to say, contracted significantly in terms of quantities, while growing in nominal terms year-on-year amid higher global prices. Of course, this changed the path of the exchange rate and, accordingly, a stronger ruble ensured a greater degree of disinflation over this period, including owing to this favourable influence on the pace of a decrease in inflation expectations. They are still high, but if we compare current changes in inflation expectations with those observed in 2015, we will see that they are decreasing faster. Exchange rate movements also seem to play an important role as usual.
As to your second question, the state of stocks in the second half of the year will probably be not the only factor, I guess, that will influence the dynamics of monthly and, accordingly, annual inflation. As usual, we will have a significant seasonality associated with the harvest, with its size, and this can also be a reason for adjustments. Furthermore, the overall price growth rate will certainly be affected by the pace of the recovery of demand taking into account the response of lending to the rather quick key rate reduction to the February levels. Actually, although the forecast was revised considerably, it remained nearly the same in terms of price growth rates in the second half of the year. In other words, this revision is in fact a surprise largely in terms of inflation for the two months and a slight decline in inflation expectations.
But will we actually see this in the path of the inflation rate? We would wish to know this as we would thus have a notably narrower range of the forecast for the remainder of the year, whereas it is still wide, namely
QUESTION from Bloomberg:
My first question is as follows. Russians were dreaming of a strong ruble for a long time. At last, their dreams have come true. The ruble is becoming increasingly stronger, but nobody is happy with this for some reason. How will the ruble exchange rate be changing in the future? Can the Central Bank do anything to weaken the ruble?
And the second question, please. You have said that the decline in economic activity is less significant than you expected in April. What is the reason for this? It turns out that the effect of the sanctions on the Russian economy has been less serious than it seemed initially.
ELVIRA NABIULLINA:
As regards the exchange rate, despite the introduced foreign currency restrictions, we continue to pursue the floating exchange rate regime within these restrictions. Both the exchange rate and its movements affect various groups of economic agents differently. Exporters are often interested in a weakening of the ruble, whereas importers — in its strengthening. Probably, one group of economic agents which, through their actions, earlier participated in determining the exchange rate that was brought into balance has become smaller. These are foreign investors in Russian assets. Nonetheless, the exchange rate remains floating. Currently, it is mostly affected by the current account and the ratio between exports and imports and will be determined by these factors to a great extent.
The influence of key rate changes is now not as significant, and there is no instantaneous effect in the form of capital outflows and inflows. Nonetheless, our monetary policy and the key rate can influence the level of demand for imports and, accordingly, the exchange rate, but this impact will be more extended over time. I would like to remind you that by setting the key rate we are pursuing our monetary policy so as to ensure that inflation decreases to its target.
As regards the current developments, I would like to reiterate that we can see that the contraction in Russian exports has been less significant than expected initially. Possibly, the effects of the sanctions are less acute now than we anticipated. This suggests that companies are able to adjust, but it would be too early to state now that the full effect of the sanctions has already manifested itself. The situation is uncertain and is changing. Furthermore, the structural transformation of the economy, its capability to transform is also a process taking time. Therefore, it is too early to draw any conclusions at the current stage.
QUESTION from the SHERGINA channel on Telegram:
Let me return to investors as there are multiple questions in this regard because there is a vast number of investors who have entered the Russian exchange market. Could you please say how safe it is now for Russian investors to purchase foreign securities on the Saint Petersburg Exchange, in your opinion? How do you estimate the probability of the same scenario that materialised for the NRD, a potential blocking of the higher-level depository?
My second question is about ambiguous wordings in the new foreign exchange regulation where people are allowed to transfer funds to their foreign brokerage accounts and buy securities within on-exchange transactions, whereas many wish to sell, but due to the ambiguous wordings they cannot be confident that selling will not cause any violations and fines.
ELVIRA NABIULLINA:
As regards foreign securities, the risks that we have spoken of and that are associated with the regulation of these securities in foreign jurisdictions have partially materialised. Hence, this risk should be taken into account for the future, of course.
As to the foreign exchange regulation, if I understand your question correctly, when people need to sell securities and credit the funds from the transactions to their foreign accounts, they need to obtain a permit from the commission. If coupons and dividends are credited without selling the securities, then they do not need a permit for this.
QUESTION from Fomag:
I have two short questions. Is the Central Bank monitoring possible disagreements and disputes between issuers and retail investors, for instance, about dividends and other issues?
And another question, please. Is it appropriate for banks to set a fee of 30% per annum for opening a brokerage account for new clients? Is it correct or not in terms of investor protection?
ELVIRA NABIULLINA:
As regards possible disputes between issuers and investors, if there is such a dispute, we definitely monitor the situation. Apparently, we do not know about all disputes if they do not spill into public view or if we do not receive any complaints. We have a channel for sending complains, but we strive to monitor and analyse cases that are of systemic importance or require changes in the regulation, or where a dispute arose because of a violation of established rules by one of the parties that shall be thus subject to enforcement measures. Therefore, this depends on the nature of disputes.
Speaking of establishing various kinds of fees, generally, many fees are introduced on a market basis.
Considering the competition, a client may decide that a particular service is expensive and should apparently choose another broker.
QUESTION from OTS Gorsite (Novosibirsk):
As we can see, the key rate may be raised dramatically in an emergency situation, as it happened in 2014 when it was increased to 17% by 6.5 percentage points at once. This year, the key rate was raised to 20%, which is even more, by 10.5 percentage points. This is a very sharp, instantaneous rise needed to mitigate the effect of all adverse circumstances.
When these unfavourable circumstances are already under control, economists and business process participants are often wondering why the key rate is not cut as sharply in order to relaunch lending processes and boost demand and the development of business and production?
In the current situation, the key rate was returned to its initial level of 9.5% over three months, that is, an entire quarter, which is a rather long period.
ELVIRA NABIULLINA:
Firstly, this was not a very long period, this was sufficiently quickly. We raised the key rate to 20% due to financial stability risks, in the first place. Later on, we removed this increment from the key rate, needed due to financial stability risks, within several sizeable steps. Today, we mostly take into account inflation trends and the steady factors of inflation.
Currently, we are still not confident that the steady components of inflation have declined. Therefore, the situation should be monitored. Nonetheless, we are making rather large steps to ensure that the key rate is at a level that will help decrease inflation to 4% in 2024.
QUESTION from RBC:
As my colleagues have already touched upon the topic of Bank Otkritie and VTB, could you please say at what stage the discussion of this process is now and how quickly it may complete, if at all?
My second question is about bonds. Does the Central Bank see any risks of cross defaults if issuers in Russia are not allowed to make payments on bonds in rubles?
And another question is about substitute bonds that the Ministry of Economic Development has been speaking of a lot. Will such securities be available to domestic investors or will foreign investors be also allowed to purchase them in any way?
ELVIRA NABIULLINA:
Answering your first question, the parameters of a possible transaction are currently under discussion, but we will be able to announce the details and timeframe after this discussion is ended.
As regards potential risks related to the default, I have already said about this. We can see no risks in this respect that could be associated with capital inflows and outflows. Nevertheless, in order to prevent the materialisation of cross default risks as, indeed, a number of contracts do involve these non-financial and financial triggers, the authorities are currently drafting amendments to laws that will not classify such a situation as cases when creditors may claim early debt repayment because an issuer is unable to influence this situation in any way.
As to substitute bonds, exchangeable bonds, such law and amendments to the legislation are currently being prepared and we definitely support the introduction of such exchangeable or substitute bonds. We hold that these bonds should first of all protect Russian investors as they are now facing a situation when their rights are violated, when money is not transferred to issuers and payments are not credited to their accounts.
QUESTION from the Funny Money project:
I have two simple and interrelated questions. The first one is as follows. Three-month deposits at 20% interest rates opened in March are now maturing. Many banks have already started to make tempting offers to deposit funds with them promising a 30% interest rate — this is a deposit plus financial instruments. However, banks do not say a single word of risks in their ads. How will the Central Bank monitor this? Will it, pardon my French, rap them on the knuckles for such calls as an interest rate of 30% seems to be kind of insane?
And another short question please. What is your opinion about the fact that a part of these funds will now be spent in the consumer market, that is, do you take into account this risk which can potentially provoke a slight spike in inflation?
ELVIRA NABIULLINA:
This is true, many deposits at increased interest rates are now maturing. As you remember, during the pandemic when we eased our monetary policy, deposit rates declined and there was a broad variety of structural products offered in the market that included both a deposit and a complex instrument. Of course, this can happen now. We receive relevant signals and are going to toughen up conduct supervision to protect consumers from being misled with various kinds of complex products by institutions that do not explain the inherent risks.
We will be closely monitoring this situation. I would like to repeat that this risk might arise as interest rates go down.
Indeed, a part of funds that people held in deposits at high interest rates can now be used in the consumer market. We do take into account this factor. This is exactly what can boost consumer demand which is needed in the current environment.
QUESTION from Reuters:
Can you see any risks to financial stability, inflation, and the ruble exchange rate associated with some banks’ decision to introduce a fee on foreign currency accounts we have been speaking about already?
And the second question, please. How do you estimate the probability of the cancellation in September of the ban on withdrawals of more than 10,000 US dollars from foreign currency accounts?
ELVIRA NABIULLINA:
As regards the impact of the fee on financial stability issues, the exchange rate, and inflation, we can see no such impact now. The main thing in this context is to respect the rights of the holders of such accounts.
I would like to emphasise once again that we do see this trend. It is relevant not only for fees. A fee seems to suggest that banks seek to reduce transactions that involve some foreign exchange risks. This is happening now. This is the de-dollarisation that we have always supported. Hence, we will support the current trend as well.
As to the measures introduced until September, I think that we will make a decision at the beginning of September, depending on how the situation will be evolving.
QUESTION from Magadan Media:
Recently, the key rate has been rapidly changing up and down. What could you advise to do considering such variations: to save funds in an account or withdraw and spend money? What will now be with mortgages? How has it become possible that the ruble has strengthened and what benefits does it give to us, ordinary people?
ELVIRA NABIULLINA:
We avoid giving any financial advice not because we lack some information or do not want to share our opinion, but because people have different strategies whether to save or invest. It all depends on the level of incomes, risk appetite, and life circumstances of a particular person. We are rather talking of certain principles that are essential in the financial market, of cautiousness, and of the need to always be aware of risks when making any decisions on the type of savings and investment and to ensure diversification, that is, avoid putting all eggs in one basket. These are a set of principles of a prudent, let’s say, financial market participant.
As regards the strengthening of the ruble, there were actually several reasons for its appreciation. The first one is that exports remained relatively high amid declining imports, that is, the country is receiving foreign currency revenues, whereas importers’ demand has plummeted. This is strengthening the ruble. The second factor is a decrease in the capital outflow amid the sanctions and the capital controls that we have introduced.
The appreciation of the ruble has contributed to the decrease in inflation and prices, especially for those goods that depend on the exchange rate.
I believe that the benefits of lower inflation for ordinary people are evident as nearly everyone is concerned about price growth. The slowdown in inflation is obviously a benefit for all people. However, lower inflation makes it possible to decrease interest rates, first of all on long-term loans, making mortgage loans more affordable.
As regards the future of mortgages, indeed, mortgage lending slowed down after the key rate increase, but there are now subsidised programmes that are being implemented and, above that, we are reducing interest rates. We assume that mortgage lending will be reviving gradually.
QUESTION from Vedomosti:
How significant was the contraction in the value of exports and imports in April—May, based on the data of the balance of payments? How soon the Central Bank will be able to return these figures? And the second question please. What are the prospects of legal claims for the recovery of the international reserves?
ELVIRA NABIULLINA:
As regards the claims for the recovery of the international reserves, I can only say that we are working on this issue. This is not a one-day job as we should consider all aspects.
As to exports and imports, it is possible to talk of trends. Mr Zabotkin, do you have anything to add?
ALEXEY ZABOTKIN:
I can only repeat that, basically, the quantities of exports contracted not very notably in April—May, whereas imports plummeted. In nominal terms, imports also shrank considerably, while exports actually expanded considering higher prices. In fact, the result of this is the balance of trade that we publish aggregated, cumulative year-to-date. Recent data were released just this week.
QUESTION from the Invest Future project:
I’ve got three questions. The first one is rather common but very important. Does such a strong ruble as it is now have a negative effect on Russia’s economy? If yes, is the Central Bank planning to employ any additional instruments? If no, what is the approximate level that would be harmful?
My second question is about the redemption of unfriendly countries’ bonds in foreign brokerage accounts as Executive Order of the Russian President No. 7981 is inconsistent with the Central Bank’s answers on its website and the minutes of the Government Commission regarding foreign exchange regulation.
Another question, please. Will there be any investigation of the removal of funds from FXRB by FinEx or is it beyond the Central Bank’s mandate?
ELVIRA NABIULLINA:
Speaking of the exchange rate of the ruble and the level that would be harmful for the economy, I would say that, in our opinion, what could really harm the economy is an exchange rate regulated to the benefit of one group, whether exporters or importers. To the contrary, a floating exchange rate is what helps find an equilibrium in the market as it balances the interest of exporters, importers, and other participants in the economic process. Our monetary policy is not aiming to achieve any particular exchange rate although our monetary policy might have an indirect influence on the level of the exchange rate.
Maybe Mr Zabotkin would like to add something in this regard, and then I will answer the other questions.
ALEXEY ZABOTKIN:
I would just add a few details. Indeed, monetary policy influences the exchange rate. Currently, this influence is more extended over time, as we discussed in detail at the previous press conference. Hence, I will not repeat myself, especially as the time is running out.
However, monetary policy is not targeting any particular nominal level of the exchange rate — it is only targeting low inflation. In the long run, a country having low inflation will also have a stronger national currency, as compared to an economy where inflation is high. This is a totally predictable pattern.
ELVIRA NABIULLINA:
As regards possible inconsistencies between our clarifications and executive orders, and so on, could you please clear out what you are talking about in particular? Our clarifications are prepared by lawyers and they definitely see no inconsistencies. It would be probably better if you just forward this information for them to sort it out. Speaking of the FinEx funds, indeed, they were established not according to Russian law, but according to European law, specifically the law of Ireland, and thus all procedures associated with these funds are subject to foreign law, that is, they do not have a Russian licence and are beyond our supervision.
The only thing I can say is that the Moscow Exchange is currently considering the issue of delisting of these funds.
Thank you.