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Speech by Elvira Nabiullina at the plenary session of the State Duma of the Russian Federation

15 November 2022

Good afternoon, Mr Speaker [Vyacheslav Volodin — Ed.]. Good afternoon fellow colleagues.

I am here to present the Monetary Policy Guidelines. The Monetary Policy Guidelines are a key policy document that outlines our vision of economic development for the next three years, and explains the course of action we will take to accomplish our goals and keep inflation close to target. The ultimate objective of this strategy is to put the economy on a recovery and sustainable growth path, which is predicated on sustainably low inflation and the easier credit it brings.

Let me first thank you deputies for the great work you have been doing this year. This summer, we had to make major changes to our regulatory environment, aiming at creating a working defence against sanctions. In the spring session alone, the Duma passed as many as 39 laws related to the Central Bank’s mandate.

Before I present our forecast, let me briefly comment on the outcomes of this extremely non-standard year.

Between the end of winter and early spring, our financial system came under enormous pressure from sanctions. And yet its operations carried on uninterrupted, and consumers and businesses continued to obtain credit resources.

Three enablers are behind that system resistance, we believe.

One is inflation targeting and a floating exchange rate.

We were able to check the uptick in inflation early in the year, making a rapid decision to raise the key rate. As we put the economy on a surer footing and head off the risks of inflation spiralling out of control, we acted equally rapidly to reduce the key rate at the several extraordinary Board meetings we held for that purpose.

This now takes our current inflation to a level close to that of our peers, even though the shocks we had to withstand were much more massive. Speaking of the key rate, it is now down two percentage points from early February, and this comes at a time global central banks are implementing monetary tightening through rate rises.

We are working to set inflation on a path to gradual decline. We recognise that the effects of this inflation stance take time to show, and price growth may remain persistently high for a while. Our target for inflation is 4% in 2024.

A floating exchange rate is known for the major benefits it brings for the economy. As it did in past crises, it takes the brunt of the shocks, helping the economy adjust to changing external conditions, and it still is.

The major risk in early spring was a sharp decline in imports, shortages of consumer goods, equipment and components. Businesses struggled to secure new supply channels and find new partners in countries new to them. As the ruble strengthened in the second quarter, it put consumer and investment imports on course for recovery, in defiance of the added costs of logistics and the higher output prices. In other words, it is working to guide the economy towards a new geography of global cooperation, akin to a safety valve activated in response to product supply restrictions.

Enabler two is financial stability. The sanctions were meant to push our financial system into a free-fall collapse. Making preparations for such non-economic risks as sanctions is no easy thing, and mathematical models fail to price them in — which was exactly the calculation. However, we had made consistent efforts to strengthen the resilience of the financial system to overall shocks, and the efforts helped.

Our policies worked to free the market of persistently unsteady banks that would collapse under such pressure and cause knock-on effects. This is another reason why banks had to create so-called capital buffers — essentially a capital cushion for a rainy day. In the course of the pandemic, we released those buffers; thereafter banks were able to restore their safety cushions to resort to them again in the spring. With banks being stable, we can see a solid pace of credit expansion consistent with increased needs of the economy.

The third enabler is a self-sufficient financial infrastructure. The National Payment Card System enables card payments in both Mir and the global payment systems that exited Russia.

The Bank of Russia’s Financial Messaging System is our SWIFT equivalent that provides uninterrupted services to banks domestically. The system has been fully operational for several years. This year, its traffic is up almost a quarter and counting, following the disconnection of some banks from SWIFT, and the system’s capacities are all set to sustain such growth.

Russia now boasts its own rating industry and a national reinsurance company. I have to admit that the exit of international companies in these sectors was certainly a nuisance. But it will have no devastating effects; nor will it cause a shutdown of capital markets or disrupt the regulatory system.

Evidently, all these safety factors in the financial system and the economy that protect against sanctions came about as a result of consistent and long-term efforts. At a time when the economy is undergoing transformation, it is imperative to adhere to the principles, the basic approaches, that deliver and show a way out of what seems to be deadlock.

Certainly, we responded to the crisis with special measures, namely, the aforementioned sharp increase in the key rate to counter inflation and financial stability risks.

Capital controls were enacted in response to the freeze of our foreign currency reserves, in an effort to stabilise the foreign exchange market. Thereafter however, we scaled back the all-out measures involving tight limits. Partners and investors in the countries we will be cooperating with and — more importantly — our citizens and investors will show more confidence in us if we save administrative measures for only urgent need.

To help the financial system adjust, we introduced a package of unprecedented regulatory relaxations. That helped the financial market weather the first storm. Many relaxations are to be rolled back by the end of the year. This is also very important. If regulation ignores real risks or a change in conditions, it becomes an internal factor of instability in itself. We cannot let that happen.

You will remember the strong volatility in the stock market in early spring. At the time, we had to suspend trading, resuming it section after section. Ultimately, to defy the widespread negative outlook, the stock exchange market resumed normal operations as early as late March. Incidentally, we had grave concerns about how to resume OFZ trading, and at the time, we even unveiled an insurance mechanism by the Bank of Russia so market participants can feel confident. But we did not have to resort to it in the end. What this shows is the confidence of market participants that inflation returns to normalcy in the medium term. It is important to stress here that the rate of inflation is important not only for households and businesses — it is a key component of the entire financial market, a benchmark for investor forecasts of returns.

We did not hesitate to use our toolkit to help banks’ clients and made the payment holidays option available again to a wide range of borrowers. We also enabled the preferential refinancing facility for banks issuing SME loans to support lending to small businesses.

The bill that would legalise payment holidays as a permanently available option is before the State Duma now. We were involved in drafting this bill, and we believe that the payment holidays option is very important and useful. There may come a moment in a person’s life when they must address their most acute problems rather than spend all their resources on loan repayments. We can see that an overwhelming majority of borrowers who took such holidays manage to overcome their temporary difficulties and resume repayments on schedule. We hope that the bill passes.

The anti-crisis package and current policies has brought about a more acceptable level of interest rates, a decline in inflation, and a well-functioning financial sector that meets the needs for credit resources and boasts a whole set of stock market tools. All these are the prerequisites for economic transformation.

The slowdown in inflation and a lower key rate has paved the way for credit expansion. The corporate loan portfolio — loans to businesses — is growing at a pace that is close to last year’s. Credit is now needed for business transformation. Banks can ramp up lending thanks to their capital stock. This is where tangible support also comes from the Government’s programmes.

Mortgage loans have added about 12% this year. This is a solid figure in the context of a drastically changed geopolitical environment when people tend to postpone decisions to buy an apartment. Mortgage loan disbursements declined in March, which hardly came as the result of the high rate alone: in October, when the rates were unchanged, disbursements also dropped 20% on September. Mortgage loans are now beginning to show an improvement, though.

While its growth falls short of the past year’s 21% expansion driven by subsidised mortgages, signs emerged at some point of an overheated market. They are gone by now, but we are concerned about developer-subsidised mortgages that even come with seemingly zero rates. But our analysis shows that such mortgage products have a 20–30% premium on a flat price. The resulting overpayment is even larger than the reduction in interest. More so, the flat will never sell at that price in the secondary market. This creates risks for both borrower and bank given the inflated price of the asset used as collateral. We have designed policies to control risks in this sector, and we expect them to be in place early next year.

Now on to our forecast which underlies our monetary policy.

Our basic forecast assumes that current trends in global economic development will be sustained. In an effort to tame inflation, central banks across the world are raising policy rates. Under the baseline scenario, higher rates are set to hold back growth, but we will escape a large-scale global crisis and the global financial system will remain resilient.

Our forecast assumes a 3–3.5% decline in the national economy this year. It is to resume growth in the second half of next year. GDP growth rates are expected to stabilise at 1.5–2.5% over the next two years. Its subsequent growth will depend on the success of the economic transformation programme. And this programme needs financial stability. The transformation process will surely slow because of growth in inflation.

We expect inflation to decelerate to 5–7% in 2023 to return to the 4% target in 2024.

The key rate in the baseline forecast will be 6.5–8.5% next year, 6–7% in 2024, and 5–6% in 2025.

Lending to the economy will grow at a pace of 8–13% next year and slightly higher thereafter in 2024.

Russian business models will undergo a transformation in the years ahead as companies will shift away from selling commodities to manufacturing products with a higher degree of processing, changing the geography of relations with customers and suppliers.

Importantly, this process will apply to all sectors. Some industries and companies will find the process easier, and some, more difficult. This will depend on how damaged foreign economic relations are, whether new ties prove tenable, and whether companies succeed in making forays into global and domestic markets.

The second scenario is called Accelerated Adjustment. It assumes that companies can secure such relations faster and can sustain their new footing in the markets. In this scenario, growth resumes as early as next year, inflation movement to target is faster, and monetary policy looser.

The third scenario is Global Crisis. The name is self-explanatory. It is likely if the central banks of advanced economies were forced to raise rates, to fight inflation, to a level that triggers a recession and even problems in the financial system. Their economies have accumulated massive debts, which pose a threat if the monetary policy stance is tight and policy rates are high in these countries. Another factor may further complicate the problems — stronger geopolitical tensions and new sanctions on Russia. This will add to fragmentation in the global economy. In this scenario, these factors combine to cause a decline comparable to 2008–2009.

The scenario suggests a longer downturn in the national economy global demand and potential new sanctions. Growth does not resume until 2025. Inflation is higher, and a tighter monetary policy is needed. We would not bring inflation to target before 2025.

The pace of structural adjustment and balanced growth in the future will mainly depend on external conditions. And yet, they depend on us in the first place.

The Bank of Russia’s policy will be designed to ensure the financial system fully meets the changing needs of the national economy.

And this is our plan for the future.

First, we aim to ensure sustainably low inflation. Let me emphasise: it is only this level of inflation that enables the development of long-term financing, including investment, in the first place. This is why the goals and principles of our monetary policy remain.

Second, there are areas of strategic focus — they need accelerated development and therefore major financial resources. The Bank of Russia will be ready to apply incentive-based regulation to banks to drive growth in credit support for projects in such areas. This is the area where we will be guided by the so-called taxonomy (criteria, to put it simply) of projects aimed at technological sovereignty and economic modernisation, which the Government is developing with our assistance. Our banking regulation will be adjusted accordingly.

Third, it is imperative to develop the capital market. In fact, it should serve as the main source of long-term financing. Stock market tools should overall evolve consistent with changes in the economy and show more flexibility. Focus should turn to protecting the rights of retail investors, that is new players in the stock market who provide their financial resources — resources that ultimately work for the economy and for development. We need a full-fledged system of issue and turnover of digital financial assets among others.

Fourth, the digital ruble. A central bank digital currency brings benefits both outside of and within the country. It will allow us to take cross-border payments to a new level.

In general, the development of international payments remains our priority even in the face of mounting pressures on the Russian financial market and partner countries. We intend to expand settlements in national currencies and look for ways to ensure seamless settlement services for both consumers and businesses. This is a complicated problem and the solutions are under way.

I also must mention our day-to-day work focused on several problems that have come sharply in view. This is, for instance, cyber resilience of the financial sector. The number of cyber attacks has grown manifold. We will continue to refine requirements for banks and expertise in information security. We will provide cyber security training and advance information exchange. The priority here is import substitution, that is a switch to domestic solutions.

Another delivered and expanding project of note is the Faster Payments System. Although transfers between individuals in the system have become commonplace, our objective is to ensure that the system we have created enables corporate clients, as much as individuals, to take advantage of its capabilities of payment acceptance and thereby reduce costs. Our priority will be a further rollout the Faster Payments System as a means of payment for goods and services.

These are the topics among others that were discussed in detail at working group and committee meetings and in meetings with leaders. I appreciate your focused approach and interest [in our draft laws].

There is a great amount of work to be done yet. Since our economy, financial system, entrepreneurs and consumers have all shown they can withstand any challenges, we will do our best not to let them down.

Thank you for your time.