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Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 17 March 2023

17 March 2023

Good afternoon,

Today, we have decided to keep the key rate at 7.50% per annum.

Economic activity continues to expand. Inflation trends remain moderate. Households’ inflation expectations have decreased significantly, while staying elevated. External conditions have worsened somewhat. Overall, risks are still shifted towards proinflationary ones. Therefore, as before, we believe that the key rate is more likely to be raised rather than cut this year.

I would now dwell on the reasons behind our decision.

Firstly, price growth remains moderate.

Average monthly price growth rates have increased compared to the end of last year, coming close to 4%, in annualised terms.

The acceleration of price growth in January and its further slowdown in February were largely caused by one-off factors. This was especially notable in prices for electronics, construction materials, furniture, and some food products. Nevertheless, the growth rate of stable components of inflation currently stays moderate.

In contrast, prices for services have been rising considerably faster since June 2022, compared to prices for products. The accelerated increase in prices for services is often interpreted as a sign of strengthening inflationary pressure in the economy that requires a monetary policy response. This is associated with the fact that these prices are less sensitive to exchange rate movements and one-off factors in certain markets and are revised less frequently than prices for products. However, at the moment, it would be premature to draw an unambiguous conclusion that the quick rise in prices for services implies persistent inflationary pressure. The current increase in prices for services is attributed to two components. In the first place, there is indeed a stable component. It is associated with changes in wages as labour costs account for the largest percentage of the production cost of services. However, the second component is catch-up growth. Beginning from the middle of last year, we have been observing the adjustment of prices for services after the pandemic and the surge in prices for products that occurred last spring. At the moment, it would be difficult to estimate the proportions of these two components in the current growth of prices for services. The adjustment will end gradually, and the growth rate of prices for services will largely depend on steady factors. We will closely analyse the data received in this regard.

Households’ inflation expectations considerably decreased in March. Respondents note a slowdown in inflation. Besides, they have become more optimistic about the future economic situation in the country and their personal finance prospects. Nevertheless, inflation expectations of both households and businesses are persistently elevated overall.

Secondly, economic activity continues to trend upwards.

The actual changes in GDP over 2022 turned out to be more positive than we expected. Public demand was an important factor that supported economic activity last year.

At the beginning of this year, business activity continued to increase, according to high-frequency indicators, including the Bank of Russia’s Business Climate Index. We have been observing notable improvements in some manufacturing sectors, construction, transportation, and trade.

Businesses continue to adjust to the changed environment. Of course, there are still certain difficulties with supplies of equipment and components. However, our regional branches generally report that many companies have refocused on alternatives or switched to parallel imports of investment goods. Segments focusing on domestic demand are developing. Thus, auto manufacturers in a number of regions are now increasing the utilisation rates of their production capacities after a pause. Textile enterprises in the Central Federal District are launching their in-house apparel brands taking the niches that became vacant. Manufacturers of paper and paper products in the North-Western Federal District have managed to redirect their supplies from the external markets to the domestic one and expand the range of their products. More details about the adaptation of different industries can be found in the March issue of our Regional Economy report.

The elimination of infrastructure and logistics bottlenecks progresses: there are new warehouse complexes, terminals, and transportation routes being created. These projects are greatly supported by government investment.

The recovery of business activity influences the labour market as well. Real wages continue to rise across a large number of industries, while unemployment is at its record lows. Companies continue to abandon part-time employment schemes, and the demand for workers of a wide range of professions is growing.

Consumer activity remains subdued. We expect it to expand gradually. This will be driven by three factors. First of all, this is a decline in the propensity to save. Currently, people still prefer to make savings due to the precautionary motive that appeared because of rising uncertainty last year. They continue to form safety cushions thus feeling more confident. As overall uncertainty goes down and people accumulate a certain comfortable amount of savings, their propensity to make additional savings might decrease. The second driver of consumer demand will be growth in wages and incomes. Third, households will gradually get used to the new range of products. It is restoring stage by stage, and companies are creating new brands replacing those that exited the Russian market. However, consumers are still reluctant to switch to them. A specific feature of this is that the demand for repairs of equipment and clothing has risen. In other words, people probably prefer to prolong the service life of the products they have got used to, rather than purchase new items, as they did previously. Nevertheless, they will sooner or later need to buy new equipment and other items.

We expect that external demand will be substituted for domestic demand to an increasingly greater extent, which will be driven not only by the public sector, but also by the rebound in consumer activity. We will assess how the expansion of demand will correlate with the capacities to ramp up the output of goods and services.

Thirdly, Monetary conditions.

Monetary conditions have generally remained the same, staying neutral. Since our February meeting, yields on federal government bonds, as well as credit and deposit rates have changed only slightly. 

Credit to the economy continues to expand. Growth rates in corporate lending remain high. A slight decline at the beginning of the year was caused by the extensive advanced funding of budgetary expenditures. They partially replaced companies’ needs for short-term borrowings.

Retail lending growth is moderate, while individual segments demonstrate diverse trends. Specifically, mortgage lending continues to expand fast. Growth in consumer lending is slower, which is largely explained by borrowers’ and creditors’ cautious behaviour, as well as the effect of the macroprudential measures taken.

Although bank loans remain the major source of money supply growth, the budget is becoming increasingly more important. In addition, the significant increase in ruble money supply is associated with the expansion of the demand for money and changes in the demand structure. A lengthening of payment chains and higher prices are increasing working capital needs. As external liabilities are substituted for Russian banks’ loans, this process is also creating an additional demand for money. Hence, although the growth rate of ruble money supply is at a historically high level, it generally correlates with monetary neutrality.

Now, I would like to speak of external conditions.

Since our February meeting, they have slightly worsened. In particular, there are new restrictions on Russia’s external trade that became effective. On the other hand, the removal of transport infrastructure bottlenecks progresses, and there are new routes arranged for delivering exported and imported goods. Import quantities that surged in the second half of last year remain relatively stable. However, there are persistent difficulties with the sale of exports. As compared to both 2021 and 2022, export quantities are still lower.

The lifting of anti-pandemic restrictions in China will have a positive effect on the world economy. For the Russian economy, this can mean more active mutual trade and new opportunities for exports and imports. This can also be an additional driver for the tourism industry.

Assessing the external conditions, I should definitely comment on the current situation in the US and European banking systems. It has no direct effect on the Russian financial system. However, this new factor itself is increasing uncertainty about the future path of the world economy. For the Western central banks, the current situation exacerbates the problem of finding a balance between monetary policy objectives and financial stability risks. On the one hand, we can see that the financial sector is vulnerable to interest rate risk and other risks. On the other hand, current inflationary pressure is persistently elevated. Combined, these circumstances might aggravate the risks of a recession in the world economy, despite the positive data that we have seen recently. For Russia, a slowdown in the world economy would involve a contraction of the demand for our exports, which might entail additional proinflationary pressure.

I will now speak of the main risks to inflation.

Our assessment of the ratio between proinflationary and disinflationary risks has remained almost the same. All the factors that we focused on in February are still relevant.

First of all, this is the path of budgetary expenditures. We perceive their growth at the beginning of the year as their redistribution within the year. In the current conditions, budgetary expenditures offset the contraction in the private sector’s demand. Further on, we will consider a deviation from the announced path of fiscal policy normalisation as a proinflationary factor.

Second, this is the labour market. Staff shortages might become more acute. Migrant flows might cover labour demand to a certain extent. However, even in this case, there are still material risks that labour productivity will rise more slowly than real wages.

The third risk is consumer demand trends. Households might shift from savings towards higher consumption faster and more sharply than we expect. In this case, demand might expand more quickly than supply, even considering the debottlenecking that we are currently observing.

Finally, the sanctions might be tightened further. If the demand for exports contracts, this might weaken the ruble, which will then pass through to prices. More complicated logistics and settlements in trade or other constraints might also push up prices for imports and reduce the opportunities to increase supply.

I will now speak about our future decisions.

Inflation trends are generally in line with our forecast of 5–7% this year. Economic activity is slightly better than expected.

The range of the average key rate for this year is 7.0–9.0% per annum, and we expect to return to the neutral range in 2025. We usually update our calculation of the neutral rate in July, when preparing our Monetary Policy Guidelines. Nevertheless, we can say already now that there are three factors that will have a significant effect on it. In the first place, this is fiscal policy, namely the level of the structural budget deficit. Second, this is the risk premium for the Russian economy. Third, this is the level of foreign risk-free interest rates. Due to these factors, we will probably raise our estimate of the neutral rate. However, we will assess the contribution of each of these factors closer to our July meeting.

We will make our future decisions on the key rate considering the need to return inflation to the target in 2024 and stabilise it close to 4% further on.

Thank you for attention.