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Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 23 July 2021

23 July 2021
Speech

Good afternoon,

We have made the decision to raise the key rate by 100 basis points to 6.50% per annum.

Our today’s decision is based on the updated macroeconomic forecast that was significantly revised. The growth of the Russian economy sped up in the second quarter, and inflationary pressure turned out to be higher and more persistent than forecast. Some sectors are already demonstrating signs of overheating. Inflation expectations also continued to go up. Given the observed trends, we have revised our inflation forecast upwards by one point. This year, it will equal 5.7–6.2%. The important step in our policy, which we have made today, is needed to bring inflation back to the target. We expect inflation to slow down to 4.0–4.5% next year and stay close to 4% further on. Nonetheless, our policy will not contain the steady rates of economic growth.

I would now dwell on the factors behind our today’s decision.

I will start out with inflation. As of 19 July, inflation was 6.5% in annualised terms. This is considerably above the target and is close to five-year peaks. High growth rates are driven by both temporary and steady factors. According to our estimates, steady factors dominate at the moment. They are associated with the fact that expanding demand in many industries exceeds their potential to ramp up output and imports. This accelerates price growth as well.

As to the product groups where prices rose the most in the second quarter, these are construction materials, furniture, and cars. When people expect prices to rise faster, they decide to make large purchases earlier. To do this, they use both savings and borrowings. Growth in consumer lending again sped up to a quite high rate, which was driven by accommodative monetary policy, among other things. On the other hand, accommodative policy lowered the demand for bank deposits, especially given accelerated inflation.

There are also other markets where price growth was rather caused by one-off factors and limited supply. This is tourism, for instance. Only a part of foreign destinations have been reopened, whereas Russian resorts’ infrastructure is still insufficient to accept the entire tourist flow. As a result, prices for tourism services soared, which also sped up inflation in June. Furthermore, May—June recorded a surge in prices for such vegetables as cabbage, potato, carrot and beetroot, which was because 2020 harvest stocks started to end before the new harvest supply. However, the contribution of such one-off factors to overall inflation is smaller than that of steady factors. The increase in prices for these everyday products is very noticeable and significantly impacts inflation expectations.

June and the first half of July showed the first signs of weakening inflationary pressure, this is still not enough to speak of a steady decline in the inflation rate. In July, households’ inflation expectations continued to rise. In these conditions, even one-off factors might have a longer-lasting impact due to their secondary effects. To prevent this, it is essential to create conditions that would encourage the propensity to save. For this, we need higher interest rates. We should not tolerate high inflation expectations in order to prevent their anchoring at this high level and avoid a more significant increase in the key rate that would be needed further on in this case.

The second topic is the economy. According to our estimates, economic growth sped up considerably in the second quarter. High-frequency indicators show that Russia’s economy has bounced back to its pre-crisis levels. Output in two-thirds of the major industrial sectors already exceeds pre-crisis levels, and this upward trend continues. Oil production has not restored yet. Output has also not recovered in international air transportation and hotel and restaurant business. However, this was due to remaining anti-pandemic restrictions, rather than insufficient demand.

Moreover, the pandemic drastically affected the structure of demand and supply. In my previous statement, I mentioned the changes caused by the transfer of a significant portion of employees to work from home, as well as the elevated level of inventories now formed by companies.

Replenishing their inventories, companies substantially increased their demand for commodities worldwide. Russia is a major producer of key commodities. High demand for Russian exports spurs economic growth this year. As companies complete their inventories, the effect of this factor will be tapering off gradually.

The growth of oil export quantities will also be supported by the easing of the OPEC+ oil production cuts in response to the recovery of demand. Taking this into consideration, we have raised the oil price path in our forecast by 5 US dollars per barrel in the next three years. According to our preliminary estimates, the expansion of oil output under the new OPEC+ agreements will add about 0.1 pp to GDP growth this year and 0.2–0.3 pp next year. Another important growth driver is domestic demand, including both consumer and investment demand. Considering these trends, we have revised our economic growth forecast for this year upwards from 3–4% to 4–4.5%.

After the recovery, the economy will expand at a pace close to its potential. We forecast that GDP will equal 2–3% in the next two years. The possibility to achieve higher economic growth rates will depend both on the expansion of production and logistics capacities and on labour resources, their expertise and performance.

Third. Monetary conditions have been progressively adjusting to the earlier increases in the key rate, but are still accommodative.

The yield curve of federal government bonds, which is used by banks as a benchmark for the interest rates they set for their clients, has significantly increased for maturities of up to three years, while staying almost unchanged in the long end. The rise in short-term yields reflects both our recent decisions and market expectations regarding the future key rate path. Shifts in long-term yields are minor. Among other things, this is an evidence of market participants’ confidence that monetary policy will finally bring inflation back to the target. I would like to reiterate that these are long-term interest rates, rather than our key rate as such (as is often stated), that determine the affordability of credit for companies’ investment purposes and of mortgage loans.

As compared to yields on federal government bonds, interest rates on loans and deposits have responded more slowly and rose less significantly. Our today’s decision is aimed at accelerating this process. An increase in interest rates will help restore households’ propensity to save.

Growth in retail and corporate lending is close to its highest rates recorded in recent years. Many borrowers seek to take out loans as soon as possible at lower interest rates. We have raised our lending growth forecast for this year. Mortgage lending will continue to expand fast, while slightly decelerating after the amendments to the subsidised mortgage lending programme become effective. Speaking of unsecured consumer lending, we can already observe the first signs of overheating. This lending segment has been growing faster than we forecast in April. On 1 July, we returned risk weights for consumer loans to the pre-pandemic level. However, given recent months’ data, we will soon make a decision on additional macroprudential measures to cool down this segment of the retail market.

I will now speak on possible risks to the forecast. Proinflationary risks continue to prevail.

We consider that the main risk is a potential anchoring of inflation expectations at a high level. Fuelled by high inflation expectations, temporary growth might become sustained.

There is a slight increase in risks associated with a possible faster normalisation of monetary policies in advanced economies. As a result, market volatility in emerging market economies might intensify, which can affect exchange rate and inflation expectations.

There are also certain risks caused by structural changes in the labour market due to the pandemic. The demand for some professions is declining, whereas the demand for others is rising. This is confirmed by data on a record-high increase in vacant jobs. Adjusting to the new needs of the economy requires time for specialist retraining. Consequently, this provokes local staff shortages. The situation is aggravated even more due to the restrictions on the inflow of labour migrants, which affects construction and seasonal agricultural works most seriously. The situation in the labour market might increase companies’ costs.

Proinflationary risks associated with the environment in global commodity markets persist. Nonetheless, June—July recorded the first signs of a decline in world prices. Therefore, I would say that this risk is less acute than at the moment of our previous key rate meeting.

Furthermore, investment from the National Wealth Fund and geopolitical risks are still in the focus of our attention.

Disinflationary factors are much weaker.

A rich harvest might result in a more significant seasonal decrease in food prices.

The pandemic situation is still uncertain. The spread of new coronavirus strains worldwide might force countries to introduce new restrictions and disrupt production and supply chains, which in turn might slow down global economic recovery. For Russia, this would involve a decrease in external demand and intensify disinflationary risks, on the one hand. On the other hand, if borders are closed, domestic demand will remain elevated longer, which might become a proinflationary factor.

In conclusion, I would like to comment on monetary policy prospects. Beginning from March, we have raised the key rate by a total of 2.25 percentage points. We will assess how our earlier decisions have been influencing monetary conditions, aggregate demand, and inflation. We will also consider how quickly supply-side constraints have been weakening and, accordingly, what level of the key rate is needed to bring inflation back to the target. According to our revised forecast, the average key rate next year will equal 6.0–7.0% per annum. Further on, as inflation expectations go down and inflation decelerates, the key rate will return to its long-term neutral range. We still estimate this neutral range to be at 5–6%, provided that inflation is close to the Bank of Russia’s target of 4%.

Thank you all for your attention.

Q&A for the Media

QUESTION from Reuters:

Could today’s increase in the key rate be the last decision made to tighten monetary policy and in what circumstances might that be the case?

ELVIRA NABIULLINA:

It is still too early to speak of this as current trends are highly uncertain. It is neither impossible nor inevitable.

The conditions that would make it the last step towards policy tightening include a decreasing impact of steady inflation factors and a sustained decline in inflation expectations.

QUESTION from Interfax:

Do you believe that Russia has already passed the inflation peak? How probable is deflation in August—September, according to your forecasts? What options for a key rate increase did the Central Bank consider today? Did you discuss all the options: 25, 50, 100 and even the uncommon 75 basis points? Previously, you spoke of a possible downward revision of the inflation target following the analysis of the monetary policy. When will you return to this issue and how probable is it that the target will be decreased?

ELVIRA NABIULLINA:

As regards inflation, the current price growth rate, if we imply a seasonally adjusted rate, has apparently started to edge down already. We can see that it was lower in June than in May. However, annual inflation will most likely stay close to the current levels during the next few months, largely due to the base effect. We expect that the decline in pressure on prices, in annualised terms, will be obvious beginning from autumn already.

As for deflation, or rather a seasonal price decrease in the last months of summer — early autumn, this depends on the future harvest of fruits and vegetables. We believe that such seasonal reduction in prices is possible.

Speaking of the key rate and the options we considered today, the Board of Directors did not discuss today a possible increase by 25 basis points, which was due to the current trends in inflation and inflation expectations and our inflation forecast. We considered the options of 50, 75, and 100 basis points.

As regards a possible revision of the inflation target (both its format and level), we will do this within the review of our monetary policy we announced earlier. We are starting this review now, and the process will take an entire year. Currently, we are preparing a working plan for this review and will present it approximately in the second half of September. The work will include various aspects, including analysis, discussions, and articles, and we will thus comprehensively assess the appropriateness and the need to adjust certain parameters of our monetary policy. This is the work we plan to carry out in the near future.

QUESTION from RIA Novosti:

On Friday, the Bank of Russia slightly smoothed the signal regarding its future actions. Do you consider it will be needed to raise the key rate further at the meeting in September?

What key rate level will help bring inflation in Russia back to the target, according to your expectations?

ELVIRA NABIULLINA:

Indeed, we have smoothed the signal somewhat. We will explore the need to further raise the key rate at our next meetings. We will assess whether this is needed taking into account incoming data and, accordingly, our revised forecast of further changes in the economy, inflation, and so on.

As to the key rate level we need, we will make our decision on monetary policy and set the level of interest rates so as to return inflation to 4%. Currently, we anticipate that the key rate will average from 6% to 7% next year, which will help us bring inflation to 4–4.5% next year. The exact path will certainly depend on how the situation develops.

QUESTION from Bloomberg:

You have raised the inflation forecast for the next year to 4–4.5% by the end of the year. In other words, there is a risk that inflation will not decline to the target by the end of next year. How high is this risk and what are the reasons for it considering your today’s decision to aggressively raise the key rate? Do you mean that this might not help and you might need to increase the rate further?

ELVIRA NABIULLINA:

I would like to remind you how the target is defined. Although we have a clear point of 4%, we define the target as ‘close to 4%’. Of course, it is impossible to constantly keep inflation at 4%. Saying 4–4.5%, we mean that this rate is close to 4%, which is our target. As proinflationary risks definitely prevail, the stated range reflects this.

Moreover, we will bring inflation back down to 4–4.5% next year from the higher rates. We will certainly analyse inflation movements in the future and changes in steady inflation factors. They will largely impact further developments and, accordingly, our monetary policy decisions.

QUESTION from TASS Agency:

I would like to ask you a question about the revision and in-depth analysis of the Bank of Russia’s objectives and instruments. Why have you announced this now? Alexey Zabotkin (Deputy Governor of the Bank of Russia) said that the target would be revised downwards, if such a decision was made. Please, clarify this.

My second question, if I may, is about mortgage lending. You have raised the forecast for this year. Do you think that the risks of overheating in this market are as obvious as before? Would not this require several rounds to tighten the regulation?

ELVIRA NABIULLINA:

As regards the review of our monetary policy, it has been a while since we reached our inflation target of 4% within the inflation targeting regime. Therefore, we believe that we have quite a number of reasons for such retrospective analysis.

As we said earlier, we will also review the definition of the target (that is, whether it should be a point or a range), including the level of the target. If we revise this target in terms of figures, it will be revised downwards, rather than upwards. We believe that it would be unreasonable to raise the inflation target: in the long run, inflation exceeding 4% does not provide the benefits that are possible when inflation is steadily low overall. In other words, in this case, both households and businesses would have doubts about the performance of their future plans. Moreover, the higher the inflation rate, the more intense the volatility of inflation.

Speaking of a downward revision, we might look at other emerging market economies. Many of them had similarly started from inflation targets of around 4%, but, having achieved it, then decreased their target levels. In many of them, the target level is 2% or 3%.

In other words, very few central banks have targets which are higher or even slightly higher than our target. Generally, targets are lower. Hence, we will need to assess all these factors in terms of their impact on the national economy, taking into account its structure. We will be discussing this with experts, scientists, business representatives, and the professional community for the entire year.

As regards mortgage lending, we have observed some changes since the changes to the subsidised mortgage programme. It has been quite a short period as these amendments became effective on 1 July. Data for the first two weeks show a nearly twofold decrease in disbursements under the subsidised mortgage lending programme (where the interest rate was raised from 6.5% to 7%). However, this does not mean an overall reduction in new disbursements, as a part of the loans that were extended earlier as subsidised ones may now be issued at market rates or under the expanded family mortgage programme.

Therefore, we will assess the changes, but mortgage lending expanded very fast in the first half of the year. Even though this trend slowed down in the second half of the year, the growth rate over the year in general will remain considerable, and we will be closely monitoring the situation.

As you know, beginning on 1 August, we raise buffers for mortgage loans with a down payment of 15% to 20%. We can see that this portion of relatively risky loans has started to increase, and it is crucial for us to maintain the high quality of mortgage loans when their growth rate is that high. We will analyse the situation and may also take additional measures if needed. The mortgage lending market is a special focus of our attention.

QUESTION from Kommersant:

In its new forecast, the Bank of Russia decreased the estimate of expenditures, including household expenditures, for final consumption in 2022–2023. Do you anticipate that a cooling in the retail lending market will happen very soon? Should we expect additional restrictions in consumer lending in the next few months?

ELVIRA NABIULLINA:

Indeed, we can observe that the segment of retail lending is somewhat overheated, as I have said already. We have taken measures to cool down this market. As I have mentioned, macroprudential buffers return to the pre-pandemic level from 1 July. However, considering the trends in unsecured retail lending, we can see that this is not enough.

We are already discussing additional measures and will soon make a relevant decision as we can observe a rise in loans issued to borrowers with high payment-to-income ratios and we believe that this trend involves high risks and, therefore, requires additional measures. We need to take measures that would ultimately decelerate retail lending expansion over the forecast horizon, to bring this growth rate in line with income increases.

QUESTION from Vedomosti:

What is the interest rate that would change depositors’ behaviour and encourage them again to deposit their savings, in your opinion? What level of securities revaluation might have a sobering effect on retail investors?

And question two, please. Given the new decision made by the Ministry of Finance on dedollarisation of the National Wealth Fund, does the Bank of Russia consider any measures aiming to make depositors replace their US dollar savings for rubles or other currencies, for instance, a reduction in the ratios of the required reserve fund related to banks’ liabilities in euros?

ELVIRA NABIULLINA:

You know it is impossible to say exactly that a certain level of interest rates would start shifting consumers’ saving behaviour. This will largely depend on the level of inflation expectations as well, because people compare interest rates with inflation they expect in the future. We can see that inflation expectations in our economy are influenced by multiple factors, including, among others, the growth of prices for basic goods, specifically such vegetables as cabbage, potato, carrot, beetroot and onion, and other products.

This is the reason why we say that these one-off factors, being driven whether by higher global prices or by seasonal factors, might also be steady factors through inflation expectations. Therefore, in this case, changes in consumers’ saving behaviour and an increase in households’ propensity to save will depend on the overall effect of several trends simultaneously.

Investors are driven not only by deposit rates, although the latter had a significant effect both in 2020 and early 2021, and we are aware of this. Investors’ behaviour also depends on the affordability of instruments in the securities market and their potential performance. Nonetheless, if deposit rates become more attractive, we might anticipate certain changes in the flows of savings from the securities market to the banking sector.

As regards dedollarisation, the Ministry of Finance made the decision on the future structure of its foreign currency investment in the National Wealth Fund.

We do not change our approaches to banking regulation, but it already includes measures aimed at increasing the attractiveness of ruble-denominated deposits and loans and making foreign currency deposits and loans less attractive. This is our policy for reducing the portion of foreign currency, including on banks’ balance sheets.

Nonetheless, at the moment, we do not consider it necessary to make such differentiation by currencies. Our policy aims to lower foreign exchange risks for the Russian economy and banking system, so that these risks remain as low as possible regardless of exchange rate movements.

We have no policy for differentiation by currency in this regard. Therefore, we have not discussed this issue.

QUESTION from RBC:

My question is about the revised forecast for exports. It has been increased more than twofold for this year, to 2.6–4.6%. What are the factors, besides higher oil prices, that the Central Bank took into account revising this forecast?

ELVIRA NABIULLINA:

You are absolutely right, we took into account not only price changes, but also an increase in export quantities. First of all, this growth of exports is driven by the fact that the global economy is bouncing back faster than it was widely expected. Therefore, the demand for commodities is also recovering more quickly, and Russia is a supplier of commodities, not only of oil. This is why export quantities are up.

Secondly, we took into account the OPEC+ agreement providing for an increase in output.

Nonetheless, as I have already said, we have also raised our forecast for oil prices.

QUESTION from the Znamya newspaper (Belgorod):

I would like to ask you whether an increase in prices for such vegetables as cabbage, potato, carrot, beetroot and onion, has been a response to a decline in sugar and sunflower oil prices. Is a decrease in inflation in Russia, which is a positive trend we can observe, also a response to the measures implemented by the regulator and the Government in the Russian Federation?

ELVIRA NABIULLINA:

First of all, I would like to note that these are actually two different process: prices for these vegetables and prices for sugar and sunflower oil. The latter have risen predominantly due to higher global prices.

As to prices for cabbage, potato, carrot, beetroot and onion, this is a seasonal change. The matter is that last year’s harvest reserves were depleted earlier than usual this year. Possibly, many of you remember that weather conditions were not quite favourable last year, due to which the quality of last year’s harvest — I mean its storage properties — was lower, as we said earlier. This year, the reserves were depleted earlier, whereas supplies of the new harvest have not yet started. This is the reason why prices for these very vegetables rose quite significantly in May—June.

Prices for cabbage, potato, carrot, beetroot and onion are already declining, and we believe that this trend will continue. This is a seasonal factor and it is not connected with sugar and sunflower oil prices.

As regards price regulation and the impact of administrative measures in general, they have really produced short-term effects. We have always emphasised and reiterate now that it is essential to consider not only temporary, but also longer-lasting effects so as not to discourage enterprises to manufacture products and ramp up their output. What should be an adequate response to higher prices? This is an expansion of output to be able to satisfy growing demand. If regulation, even if these are short-term measures, discourages companies to build up output due to possible administrative measures, this will involve long-term consequences.

By the way, speaking of the Belgorod Region, we can see that annual inflation here — and it depends on multiple factors — was 6.58% in June, which is only a little higher than generally in Russia. However, in terms of components, inflation changed differently than across the country in general. We can see that food prices rose faster in the Belgorod Region, whereas prices for non-food goods and services increased more slowly. Of course, this is also due to the specifics of the region.

QUESTION from The Bell:

Do you consider the current surge in inflation in both Russia and western countries to rather be a temporary event caused by the fast post-pandemic recovery or, possibly, a long-term trend?

And question two, please. Major banks’ executives expressed their concerns about the ecosystem regulation approach proposed by the Bank of Russia. Yesterday, the Bank of Russia disagreed with these concerns. Does this mean that you are not going to make any concessions to banks and change your concept? What is your personal opinion about banks’ concerns?

ELVIRA NABIULLINA:

As to whether inflation is short- or long-term, temporary or steady, the situation is different in various countries. Indeed, as the economy has been bouncing back swiftly after anti-pandemic restrictions were lifted and it has taken more time to adjust supply, inflationary pressure in many countries intensified. Many central banks consider that this is a temporary situation and prices will start to go down as soon as supply adjusts.

However, in all their statements, the central banks of these countries emphasise that they are closely monitoring changes in inflation expectations. They believe that inflationary pressure will edge down if inflation expectations are anchored.

Unfortunately, it has turned out that inflation expectations in Russia are not anchored. They may be anchored more strongly than before the launch of the inflation targeting regime, but as the rise in inflation has been rather long-lasting and many basic goods have become more expensive, we can observe now that inflation expectations have soared. Moreover, they have been elevated for quite a long time already, namely for nearly six months, or even longer.

As a result, one-off factors, through the mechanism of inflation expectations, are causing secondary effects and are thus turning into steady factors. This can be seen in product groups not impacted by one-off factors, such as the environment in global markets and seasonal trends. We can observe that the growth of prices for these products significantly exceeds 4%. In other words, the increase in the steady components of inflation is more than 4%.

Thus, there is currently a combination of both transitory and steady factors. However, we estimate that steady factors still prevail, which is why we should respond taking appropriate monetary policy measures.

As regards ecosystems and relevant regulation, we released two papers on the regulation of ecosystems in general and on the regulation of banks creating ecosystems. We believe that we definitely need such regulation as this activity and generally investment in the so-called immobilised assets (today, it is hard to distinguish between assets that are part of an ecosystem and assets that are not — this term is being developed now) might basically involve elevated risks for creditors and depositors. Therefore, we need to change the regulation to be able to protect depositors’ and creditors’ interests.

Indeed, banks may develop these types of activities, but the risks related to such investments should be covered with capital.

I would like to remind you that in many countries, including large economies, banks (for instance, retail banks) that raise households’ funds into deposits are totally prohibited to make investments in non-financial assets. Some countries establish extremely high requirements for capital coverage if banks decide to invest funds in non-financial assets.

We propose a relatively moderate approach. Moreover, we also suggest transition periods. Therefore, I do believe that this regulation should be introduced. Of course, we will be discussing its parameters in detail.

This is why we released our consultation paper — to discuss various issues with market participants and experts. Banks’ response was quite predictable — we could have hardly expected any other reaction.

However, we believe that we are acting to the benefit of banks’ depositors and creditors, so as to maintain the stability of the banking system. Its risks should not rise, regardless of whether banks develop ecosystems or not.

Moreover, in contrast to many other countries, we consider it really useful for banks developing ecosystems to gain synergistic effects from financial and non-financial services. However, there should be equal competitive conditions with other ecosystems that are built not around banks. I would like to emphasise once again that where a bank is the core of an ecosystem, we need to duly protect depositors’ and creditors’ interests.

QUESTION from Financial One:

How strong is the dependence of inflation in Russia on inflation in the USA? Should we expect inflation in Russia to be around 4% if inflation in the USA rises above 5%?

ELVIRA NABIULLINA:

Of course, inflation in Russia may be affected, especially in the short run, by higher prices for imported goods. Inflation and the level of interest rates in other countries might impact monetary and financial conditions, as well as have influence through other channels. However, I would like to stress once again that inflation in Russia in the long term depends on the Bank of Russia’s monetary policy stance.

I would emphasise again that our monetary policy decisions and measures certainly have a time-lagged effect. Therefore, for instance, after that surge in inflation, our decisions will definitely lower inflation, but this will happen next year.

Question from Premier (Vologda):

Recently, at the International Financial Congress, you addressed the topic of possible restrictions on floating credit rates. In particular, you said that these restrictions should be imposed with account of regional specifics. Could you please give an example of regional specifics to be considered when setting the level of these rates? Do you think that these restrictions on floating rates might cause a general rise in credit rates?

ELVIRA NABIULLINA:

First of all, I would like to say that this will definitely not cause a rise in interest rates. Why? The reason is that household loans at floating rates make only a minor portion of around 0.1%. This portion is slightly more in corporate lending. Floating rates are not widespread. However, we believe it necessary to introduce such regulation because banks have started to demonstrate interest in this instrument offering floating rates, including on mortgage loans. If floating rates become more widespread, they might involve risks for individuals raising such loans.

This is especially relevant for long-term lending where such floating may be unpredictable. As a result, households who raised loans at a certain interest rate will later on face a sharp increase in the rate. Of course, we need to prevent such a situation. We released a consultation paper to discuss the required regulation parameters with financial institutions and experts in general. Based on the results of this discussion, we make the conclusion that this regulation is really needed, in our opinion. Furthermore, this regulation should be differentiated, that is, we believe that unrestricted access to floating interest rates should only be offered with respect to rather large loans issued to the so-called qualified borrowers who are able to assess the inherent risks. These are wealthy people who have accumulated large savings and, accordingly, their risks are lower. As regards all other loans, we need restrictions on floating rates. These restrictions may vary for mortgage and consumer loans, different loan amounts and maturities. We are also discussing how they may be differentiated for various regions. This will require additional discussions to find out what differentiation would be reasonable.

What are the reasons why we believe that this differentiation is necessary? Let us take mortgage lending. For instance, subsidised mortgage loans are currently subject to a limit of no more than three million rubles. However, in Moscow, less than 10% (as far as I remember, 8%) of mortgage loans are below three million rubles, and generally the amounts are higher.

In many regions, mortgage loans of less than three million rubles account for over 50% of all disbursements. This is a completely different situation, and it may vary in regional centres and small towns. Hence, we definitely need to adjust the parameters. We are going to discuss them with market participants. We have agreed to complete the discussion by 20 August, approximately. At the moment, a relevant law is being drafted. We will prepare our own estimates and will also consider market participants’ opinions in order to make a well-informed and balanced decision.

QUESTION from Interfax:

In the first half of the year, the federal budget was executed with a considerable surplus. Many analysts already say that the surplus might remain as of the end of the year.

How significantly, in your opinion, may this situation with the budget execution influence the efficiency of containing the inflation rate? Do you assume a budget surplus or deficit in your updated forecast and what is the estimated amount? Previously, you used to give estimates as percent of GDP.

ELVIRA NABIULLINA:

Our forecast assumes that the budget will be more or less balanced in terms of the overall deficit / surplus. However, speaking of the impact on inflation, this is not the amount of the overall deficit or surplus which is important, but the non-oil and gas deficit. Even if the budget is executed with a certain surplus (which is possible), we anticipate that the non-oil and gas deficit will remain approximately the same as was planned in the budget law. Why? The reason for this is that the budget might have a surplus because of a rise in both oil and gas revenues and non-oil and gas revenues.

If oil and gas revenues increase above the planned level, they will be transferred to the National Wealth Fund and will have no effect on current expenditures. If extra non-oil and gas revenues are earned, as far as we understand, they will be used to finance additional expenditures, and this will not influence the non-oil and gas deficit. Therefore, today, we do not expect that such changes in the execution of the budget might impact inflation.

QUESTION from Reuters:

How large may be carry trade flows this year given the increased key rate, and how will this influence the exchange rate and, consequently, inflation?

ELVIRA NABIULLINA:

First of all, as you remember, the impact of the exchange rate on inflation in Russia has decreased, and the ratio of the exchange rate pass-through to inflation is currently lower. The exchange rate itself is floating and is impacted by multiple factors and not only by carry trade flows. The so-called carry trade is only one of the indicators of capital flows when hot money is invested by using short-term borrowings, and the stake is placed on the interest rate differential. Nevertheless, higher interest rates, an increase in rates, make the ruble a more attractive currency for savings both for Russians and for international investors. In this case, Russians can reduce their purchases of foreign assets, while foreign portfolio investors might expand capital inflows. I would like to stress once again that carry trade in this regard is only one of the aspects. We are monitoring these indicators. They have edged up slightly as increased interest rates are more favourable for carry trade, but the amounts are no higher than in previous periods. In our opinion, this does not have a considerable impact on the ruble exchange rate.

QUESTION from Bloomberg:

Last week, the EU published its carbon regulation framework. Earlier, the Bank of Russia gave its estimates, or rather its very basic view, so to say, in this regard. Now, it has become clear what we should expect.

Has the Central Bank already made its first estimate of related costs, taking into account the released framework? I am asking about future costs Russian companies would incur. What is your opinion about the overall effect — negative or not? How will it impact Russia’s economy? This is my first question.

And question two, please. You have already said that investment from the National Wealth Fund is in the focus of your attention. As was reported, the Government is currently discussing a possible increase in investment from the National Wealth Fund. This is not only the one trillion rubles that was, as far as I understand, agreed upon with you for three years in terms of its zero influence on the macroeconomic environment, but also a 900 billion increase for the complex in Ust-Luga, for instance. If equipment is purchased abroad for 900 billion, or nearly one trillion rubles, may this affect inflation? Or these expenses are made abroad, that is, this is admissible if allowed by the fiscal rule setting 7% of GDP?

ELVIRA NABIULLINA:

As regards the carbon issue (ESG issue), this is indeed a key factor which will be exerting an increasingly stronger influence on Russia’s economy, and not only in the short, but also in the long term. Of course, this will affect the demand for our conventional exports. We carry out stress tests, and are going to continue them on a regular basis. Actually, we completed the first stress test when we did not even comprehend all the parameters of the carbon tax. However, according to our first estimate, the stress test we completed generally took into account the framework proposed by the EU. Then, the result of this stress test showed that this impact would be rather moderate. However, we believe and regularly repeat that this influence will be moderate in the short run. We should not in any way be complacent, nor should be Russian companies, as the EU has established ambitious objectives to achieve a 55% reduction in emissions by 2030. If these taxes are not sufficient, we are aware of a high probability of their tightening. This impact might be increasing, and we certainly need to be prepared. Moreover, the Russian economy will be influenced not only by the taxes, but also by other measures of this package, including a potential ban on engines using high carbon footprint fuels, so to say, and an increase in the portion of renewable energy sources. In other words, this is a whole complex of measures.

Hence, we certainly need to take this into consideration. Secondly, this is definitely a challenge to the Russian economy, but it is also a great incentive to diversify the structure of the economy. This will encourage our economy to be compliant with all the ESG standards and contribute, so to say, to the global agenda, to the planet’s agenda for limiting climate change.

Speaking of the National Wealth Fund, its expenditures may really influence the macroeconomic situation in general and inflation, due to which they should be limited, or moderate. The key here is that the expenditure schedule should not be linked to the oil price — this link should not be restored.

As regards expenses to purchase foreign equipment, we believe that they will impact inflation because such purchases may influence both the exchange rate and, accordingly, cash flows abroad. In other words, if we purchase imported equipment, similar amounts in rubles may simply flow to the foreign exchange market, and so on. Hence, this will have an impact, and it would be impossible to negate it. We need to estimate this influence.

We consider that, in terms of macroeconomic efficiency, the best way would certainly be if resources from the National Wealth Fund were invested in those projects that expand the potential of the Russian economy and boost its potential growth rates.

QUESTION from Altaiskaya Pravda (Barnaul):

What is your opinion regarding the attempts to reduce commodity prices by imposing export quotas and duties and do these measures help contain inflation today?

ELVIRA NABIULLINA:

Overall, we believe that these administrative measures, regulatory measures, should only be applied to a limited extent. Of course, the worst thing to do would be to simply freeze prices, but even more market-based regulatory measures, such as the introduction of floating duties and quotas, should also be used cautiously. The mechanisms helping limit the impact of temporary fluctuations in global markets on the Russian market are generally reasonable, but it is essential that businesses understand them properly. Firstly, the level of such measures should support the economy when goods are both exported and sold in the domestic market, so that companies have incentives to ramp up production. Moreover, these measures should be symmetrical, or budget neutral, as we call them.

If the so-called surplus profit, or extra profit is taken out of a business during a period of favourable price movements in global markets, the business should receive compensation for a shortfall in profit if world prices go down. Thus, if companies comprehend how this mechanism performs over the entire cycle, this will impact their desire to invest funds and expand production to a lesser extent. This is how the oil tax damper works, for instance. The floating export duties introduced for wheat, corn, and barley have a similar mechanism. We need to avoid a worsening of the economic efficiency of production across the cycle on average. We should always remember that companies need incentives to expand production. Otherwise, if these duties are applied without such principles, they might involve an adverse impact on investment climate and investments in these industries.

I would like to emphasise once again that there has been a certain decline and stabilisation of prices in a range of commodities (steel, cereals, and timber) where price movements were a matter of concern for both the Bank of Russia and the Government. For instance, timber prices have decreased significantly. Although the price level still exceeds last year’s averages, proinflationary risks, at least those arising due to the above factors, have stopped growing and have even edged down somewhat since the previous meeting of the Board of Directors.

Thank you all for your attention. Have a nice day.