Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 21 July 2023
Today, we have made the decision to raise the key rate to 8.5% per annum.
The economic situation has significantly changed in recent months. First, the recovery stage of economic growth is close to completion, consumer demand is now expanding faster, and staff shortages have become more acute. Second, current inflation, including the increase in prices for stable components, has sped up. Third, the ruble has weakened. Finally, inflation expectations have risen. In such a situation, we have to start tightening our monetary policy in order to bring inflation back to 4% next year.
I would now dwell on the reasons behind our today’s decision.
Firstly, price pressure has been intensifying.
Seasonally adjusted monthly price growth continues to speed up, and the increase in the majority of stable components of inflation exceeds 4% in annualised terms.
Higher inflationary pressure is associated with demand in the first place. During the period of the recovery growth in the economy, demand was predominantly driven by the public sector. Today, the demand from the government remains high as well. In contrast, consumer demand was subdued until the end of last year. In early 2023, consumer demand started to expand, partly as a result of rising wages and consumer confidence. In the second quarter, this growth accelerated even more due to a surge in lending. When demand starts to notably exceed the potential to ramp up supply, this inevitably pushes up prices, as companies are unable to commission new manufacturing facilities and hire workers for them instantaneously.
There are vivid examples illustrating such a situation. One of them is a surge in the demand for domestic tourism. In this case, the Russian hospitality industry needs a certain period to adjust to this rapid growth, namely to construct new hotels and create comfortable places for holidays. In addition, carriers’ costs have risen considerably. However, this is the high demand for these services that has enabled companies to pass through these higher costs to prices. I can give another example where rising demand cannot be met in full as the potential to quickly expand supply is limited. This is the automobile market that is analysed in detail in our report Regional Economy.
The expansion of demand is also a factor contributing to a fast recovery of imports. Combined with the contraction in exports, this rebound has become one of the reasons behind the ruble weakening. The recent movements of the exchange rate have not yet passed through to prices in full. In addition to the direct pass-through of the ruble exchange rate to prices, we are concerned about secondary effects that might occur. The dynamics of the exchange rate affect households’ and businesses’ inflation expectations that remain elevated and unanchored. Moreover, they have risen in July. We will be closely monitoring further changes in inflation expectations and consider these trends when making our decisions.
Taking into account all these factors, we have raised the lower bound of our inflation forecast for this year by a half of a percentage point, namely to
Secondly, as regards the economy.
The recovery of economic growth is close to completion. It was characterised by high quarterly growth rates of GDP. Such a fast increase is associated with the fact that, during the recovery, companies start to use available resources, workforce and manufacturing capacities that were idle during the downturn. According to our monitoring of enterprises, unemployment has now dropped to a record low, while the utilisation rates of manufacturing capacities have reached peak levels. This also suggests that the recovery will soon complete. After this, the growth rate of the economy normally becomes more balanced and moderate.
The economy has returned to its pre-crisis level overall, except for the oil and gas sector that is subject to tight external sanctions. However, due to the structural changes in the economy, trends significantly vary in certain industries and regions. Most of those that are primarily focused on domestic demand have not only returned to the pre-crisis level, but are even beginning to surpass it. The other part of the economy focusing on exports still has very limited opportunities to completely restore output.
Another important factor impeding a faster increase in output that is affecting all industries, to a greater or lesser extent, is staff shortages. In particular, our monitoring shows that about three-fourths of machine building companies are facing staff shortages. Unemployment has dropped to a new record low. At some enterprises, employees work more than one shift as companies have increased the utilisation of both workforce and manufacturing capacities. The headcount deficit is most acute in the regions recording high economic growth rates. This problem is exacerbated because of workers’ low interregional and intersectoral mobility.
Considering the quick rebound in demand, we have raised our GDP growth forecast for this year to
Thirdly, with respect to monetary conditions.
Although nominal interest rates, including yields on federal government bonds, have risen since our previous meeting, monetary conditions have been easing overall, predominantly owing to non-price conditions.
This is confirmed by the continuing steady upward trend in lending across all market segments. The expansion in retail lending is particularly fast. Specifically, mortgage lending growth has accelerated to its peak levels recorded in recent years. The faster growth of household loans is driven by rising wages and elevated inflation expectations. Higher inflation expectations are an important factor contributing to an easing of monetary conditions.
Considering these trends, in our revised forecast that takes into account a monetary policy tightening, we have raised our estimate of credit to the economy for this year to
Now, I would like to speak of external conditions.
The growth rate of the world economy is declining. This is influencing prices for Russian exports, including gas, coal, and fertilisers, that are dropping in the global market. Thus, the sanctions and the economic cycle are both affecting Russian exports. Combined with the expansion of imports, these factors explain the dynamics of the exchange rate we have been observing this year.
Recently, the issue of the ruble exchange rate has been drawing a lot of attention, and I would like to expand on this. We believe that the main factor behind the exchange rate dynamics in June—July is the consequences of the shrinkage in exports over the past several months combined with increased imports. Normally, an exchange rate weakening causes a contraction in the demand for imports, but this has not yet happened. There are two reasons for this. The first one is time lags under contracts. The goods that are now imported to Russia were purchased at the exchange rate as of the dates of the supply contracts signed some time before. The second reason, which is the key one, is that an increase in domestic demand causes a rise in the demand for imports. Considering these factors, the earlier weakening of the ruble is yet another confirmation that domestic demand has surged.
In addition to export and import transactions, the exchange rate was also affected by the flows on the financial account. Specifically, last year, households’ money transfers to foreign accounts increased. Many were wondering how this was affecting the dynamics of the exchange rate. In this regard, I can provide the following comparison. In 2022, the exchange rate was strengthening for the most part of the year, although individuals were transferring significant amounts of funds to their foreign accounts. Compared to the second half of last year, such transfers have decreased nearly twice in the first half of this year and, in 2023, their amounts remain almost the same month-on-month. Other components of the financial account have predominantly declined as well versus the second half of last year, including the operations related to decisions by the Government Commission on Monitoring Foreign Investment that were minimum in May—June. Hence, the factor of capital flows generally has not been the main one for the movements of the exchange rate. The key is the dynamics of exports and imports.
I will now speak of possible risks.
Proinflationary risks have risen notably over the forecast horizon. They include a potential expansion of the gap between demand growth and opportunities to increase supply, partly due to consumer lending growth, that might remain fast, and a further aggravation of the problem of staff shortages. Besides, a more rapid pass-through of the ruble weakening to prices and a possibly long period of elevated inflation expectations are also proinflationary risks. A further worsening of external conditions, including a potential tightening of the sanctions, is yet another material risk.
Disinflationary risks are minor.
Winding up, I would like to comment on monetary policy prospects.
Considering the changes in our assessment of the economic situation, we will need a higher path of the key rate to bring inflation back to its target of close to 4% by the end of the next year. Our revised forecast factors in the adjustment in our estimate of the neutral rate upwards by 0.5 percentage points, namely to
In our updated forecast, we have raised the average key rate to
Thank you for attention.
Q&A for the Media
QUESTION from Interfax:
Your press release says that the key inflation driver is the economy increasingly deviating from a balanced growth path, that is, the imbalance between supply and demand. Can we say this is close to overheating? Do we understand correctly that this risk is set to be your priority for the near future? As long as this risk is likely to linger, does it mean that we are likely to need more than today’s rate hike, that is, does it mean that you are embarking on a rate increase cycle?
And question two, please. According to some analysts, the 100 basis point increase can be interpreted to suggest that the rate increase should have come earlier considering the pass-through lags. Do you share this view or do you believe that everything was done in a timely manner?
While on the risks of overheating, first, what is overheating? There is no quantification. In principle, overheating is a considerable and rather long-lasting deviation of economic growth from its potential measure — when supply-side constraints on demand lead to steadily accelerating inflation. Our policy is intended to counter this risk and ensure economic growth is balanced.
As regards what happens next, we have signalled that we do not rule out the option of raising the key rate at subsequent meetings. As seen in our forecast of the key rate in the lower bound, this increase may be sufficient, but we believe that the more probable development is an increase in the next few meetings.
On the subject of today’s decision, we mentioned and signalled last time that the increase was likely. We needed to obtain more information then. We can now see that inflation and its persistent components in the first place are accelerating, accompanied by rising inflation expectations and [adverse] exchange rate movements.
I have mentioned the totality of the factors that we have taken into account in making the decision. Admittedly, markets have responded to this signal in the time elapsed between the two meetings.
QUESTION from TASS:
Let me ask you this. Was the decision to raise the rate by 100 basis points unanimous? What other options may have been on the table? You say that your move was not predetermined, and still, do you allow another increase of this scale on the horizon?
We had an extensive discussion about a 75 and 100 basis-point rise options. It was indeed extensive in the context of more aggressive options for the rate increase, which were aimed to minimise the need for a rate increase moving forward. As things stand and based on the balance of all risks, we have decided that a rate rise of 100 basis points is the optimal solution.
Our next steps will depend on economic developments moving forward, incoming data, and how the economy responds, including to our monetary policy decision.
Mr Zabotkin, would you care to enlarge on this?
What I should enlarge is that a major part of the discussion was focused on the tactics of responding to inflation risks. Indeed, we discussed the options of a more aggressive and faster policy response, but the concerted decision was to see how things unfold and what data we have in terms of inflation pressures and the evolution of inflation expectations.
QUESTION from Moskovsky Komsomolets (information portal, Chita):
Transbaikalia is a border area, and for us, the use of foreign currencies, in particular the yuan, is high on the agenda. Would you say that this type of deposits are safe? What is to become of interest rates on yuan deposits?
True, there are signs of depositor interest in yuan holdings. However, this has yet to become common practice. Currently, the yuan’s share in individual deposits with banks is about 1%.
While on the preferred deposit currency, we refrain from making such recommendations and interfering with the market practices of banks unless these involve any direct risks for consumers or the broader system.
Doubtless, consumers should realise that any deposit in foreign currency, no matter which currency, involves foreign currency exposure. Also, a significant part of the income can be eaten up by exchange rate differences — between the buying and selling rates. The volatility of foreign currency — any currency — makes deposits similar to investments, when exchange rate fluctuations and exchange rate risks are unpredictable.
Furthermore, in making deposit decisions, consumers should be mindful of the foreign currency restrictions in place: depositors cannot withdraw cash in the account currency but only in rubles at the bank's exchange rate for the relevant currency. If the depositor realises and is willing to take these risks and restrictions, as with any other investments, it is the depositor’s right.
QUESTION from Kommersant:
The initial assumption was that the range of the neutral rate would be updated in the Monetary Policy Guidelines as soon as August or September. However, the forecast already contains the neutral rate range, so may I ask, are these two different procedures or one? Is there a chance of you revising upwards this range in September, and this time the upgrade would not be 0.5 [the 0.5pp upward revision of the neutral rate]. If this is not the case, and most likely it is not, how can you present the decomposition of this change? Which are the country risks there, and what are the other increased components, internal and external?
We have re-estimated the range of the neutral rate, and our Monetary Policy Guidelines will keep this estimate. Since our latest policy Board meeting was held before the submission of the Monetary Policy Guidelines, today’s forecast will be integrated in its first version and may be updated as its discussion progresses and, most importantly, as new data come in.
I would like to ask Mr Zabotkin to comment on the decomposition of the factors behind the re-estimation.
For the avoidance of doubt, the final version of the Monetary Policy Guidelines — the one that is submitted to the Duma — is based on the October forecast. The August version, the blue print, is based on the July forecast.
While on the rationale [for the revision of the neutral rate], consistent with previous years, the Monetary Policy Guidelines will include a paragraph with details covering our position on the neutral rate. As regards the downward revision of the neutral rate it is aligned with a certain decline in potential economic growth; we can see an increase in the risk premium on the back of higher uncertainty, as well as the opinion that the estimate for the global external neutral rate is probably slightly tilted upwards relative to its estimate in 2020, the year when the estimate for the neutral rate was progressively revised lower.
As regards the decomposition, I would rather not give you any specific figures.
Just as a reminder, this is not an observable indicator, it is an estimated range.
QUESTION from RBC:
My question is about today’s new arrangement that provides for the sale of the yuan for ₽288 billion. Could you please explain to us the rationale behind this decision? Can it be seen as a kind of a policy to support the ruble? How is it related to the intention of the Ministry of Finance to stop selling the yuan from the NWF, as some analysts report?
My second question is about the Central Bank’s view of the contribution of a weaker ruble to inflation. You mention that this effect has yet to materialise to the full extent. Perhaps the Bank of Russia has a projection for this contribution of the weakening to inflation, based on the results of this past summer?
At the time, the decision was made that part of the NWF would be invested and the expenditure would be ‘mirrored’. Subsequently, the practice was put on hold by force of circumstances. We believe that now is the time to resume this practice, with the objective of ‘mirroring’ our operations rather than influencing the exchange rate of the ruble.
As for the fact that the Ministry of Finance will stop selling the renminbi under the fiscal rule, this will depend on export and import developments and, accordingly, basic revenue projections, that is, on our performance in terms of basic oil and gas revenues.
I will ask Mr Zabotkin to elaborate on this issue.
The standard operations — regular operations as part of the fiscal rule — are governed by a formula for the relationship between actual and baseline oil and gas revenues. In this sense, they track conditions in the oil and gas market, including oil and gas exports.
What is behind this decision? This decision follows up on our analysis in July of the transactions related to NWF investments in the first half. As you know, we receive budget statistics by the middle of the month following the reporting month. This now enables us to quantify the volume of operations to be ‘mirrored’. Since NWF investments are marked by a rather uneven time distribution, the convenient way to ‘mirror’ them is by averaging the volume of transactions for a meaningful period of time. We have opted for this period to be half a year, and we are now embarking on these operations.
Speaking of the pass-through of a weaker ruble to prices, we can see early signs of this process. It usually takes a year to materialise, and its greater part materialises in six months, but the pass-through process can be affected by multiple factors. One such factors, and the one I have mentioned, is imports. Their prices have not changed so far. On top of that, when we saw the ruble strengthen last year, many businesses viewed that trend as temporary, and their business plans priced in a weaker ruble than the real rate at the time, including in import contracts. We therefore need to measure the pass-through of a weaker ruble based on the exchange rate that companies assumed in import contracts, among other things, rather than based on the actual rate. Therefore, we may be in for a slightly extended run of the pass-through.
QUESTION from Life and Invest Project:
Good afternoon, I have a question that causes concern among many retail investors. Following the release of Decree 138, the Bank of Russia issued an explainer on March 28. Based on this explainer, investors are again required to obtain approval for transactions with residents of unfriendly countries. However, in trading through foreign brokers, there is no way of knowing the investor’s counterparty. There are several questions in this regard. Is a transaction possible through a friendly infrastructure? For example, Kazakhstan considers all counterparties friendly. How should brokerage accounts, for example in the United States, be dealt with? What should an investor do if their foreign broker demands that the account be closed immediately, and the investor is actually forced to sell their papers without any approval, given that it is impossible to obtain it shortly? And what course of action is there for people residing outside Russia, that is residing less than 183 days in Russia, who are Russian citizens? Does foreign currency legislation extend to them? Does this regulation cover them? After all, they are free from the responsibility to report at all on their foreign accounts.
Yes, we are well aware of investor concerns. Indeed, there is legal uncertainty surrounding this issue, so we intend to look into the options in the near future to come up with a solution to ensure that investors have certainty.
QUESTION from RIA Novosti:
You have made the case, several times and in detail, for a possible rate rise before the end of the year, and that we may well see a double-digit rate. Is this an option the Bank of Russia considers? The upgrade in the inflation forecast applies only to its lower bound, which means you have narrowed this corridor. How high are, in your opinion, the risks of this year’s (year-end) inflation going beyond the upper bound of 6.5%?
Our baseline forecast assumes inflation of
As for the rate, we do not make projections for rate peaks but instead present the average rate either for the whole year or for the remainder. We forecast that the key rate will average 8.5% to 9.3% for the remainder of the year.
QUESTION from Argumenty i Fakty:
I have two questions, and both concern the potential fallout from the one percentage-point rate increase. The Minister of Finance says that public debt is most often bought by Russian banks, which rely on the funds they borrow from the Central Bank. The Bank of Russia assesses the cost of OFZ borrowings as too high. Can the rate rise force the Ministry of Finance to stop selling OFZ bonds and reduce fiscal spending, lift taxes, or privatise some state assets instead?
My second question is about the fact that public spending, especially defence orders, is not very responsive to rate increases. If a munitions plant commits to make 200 tanks, it will deliver no matter the rate. It is a different case in non-defence sectors: consumption can progress but can also come to a halt there. How sustainable do you think is the rebound in demand we have seen? Perhaps it would make sense to wait for people to realise the pent-up demand and stop short of lifting the rate, so this rebound would then peter out by itself?
Answering your first question, banks finance the acquisition of government securities and loans as well as the purchase of corporate bonds by attracting individual and corporate depositors. The moment an OFZ bond is placed, short-term liquidity exits the banking system and enters the budget, but as public spending is executed, this money comes back to banks in the form of new deposits of individuals and corporates. At this moment, banks may need short-term liquidity for the time between the placement of OFZs — when the budget raises money — and the time when public spending is executed. This is indeed the time banks rely on central bank liquidity.
However, what really matters is that deposits, generated in the economy, including those additionally generated by public spending, ultimately become a substantial source of financing for new OFZs. This facility, through which banks lend to the government, outside of money creation by the central bank, helps the budget deficit influence the money supply.
You also ask whether the rate increase will drive up government borrowing costs. Borrowing costs for the government and other borrowers alike are determined by the level of inflation and inflation expectations. High inflation accompanied by unanchored inflation expectations suggests a high key rate and high interest rates, whereas a consistent monetary policy with a focus on price stability will drive down the cost of financing, including for the government. It is impossible to imagine that the combination of a low key rate and high inflation would work to lower rates in the economy. The opposite would happen: a rise in inflation expectations would send the inflation premiums higher.
This is why our policy is intended to ensure that there are essentially moderate rates on long-term borrowings in the economy.
Let me give you a clear example of the fact that the key rate does not directly affect the level of interest rates. The key rate had been unchanged since last September at 7.5% up to this moment, but OFZ rates have shown a strong rise. This growth has occurred largely on the back of gradually mounting inflationary pressures and stubbornly high inflation expectations.
As for the second question, I agree that the various components of aggregate demand are not equally responsive to monetary policy, and you are also right when you say that deferred demand effects were at play in the first half of this year.
At the same time, our assessment assumes that the recovery in consumer demand and the expansion of investment demand are largely sustainable. They are supported by growing incomes and a dynamic expansion in lending. These trends in themselves are unlikely to go into reverse. High employment shores up growth in income, improving credit ratings of individuals, so, in the context of rising incomes, banks are more willing to lend to them. Rapidly expanding aggregate demand spurs business credit activity: businesses are also more willing to borrow, and banks are more willing to issue loans them.
A strong willingness to borrow is also fuelled by high inflation expectations: as they expect inflation to rise, businesses and households are more willing to borrow. When public demand is invariably high, a rapid expansion in the private sector of the same scale increasingly translates into strong inflationary pressures. Therefore, the monetary policy decisions we make are aimed at ensuring that this elevated demand does not feed into rising prices but translates into growth in physical outputs and consumption — which really works to improve people’s well-being.
QUESTION from BankInformService Project:
Will the Bank of Russia extend its restrictions on cash withdrawals from bank accounts and deposits? Are there any plans to review the restrictions?
The restrictions are in place until 9 September. We have yet to make the decision, but it is safe to say that for the moment, there are no reasons to lift them. As a reminder, these restrictions were imposed in response to the sanctions targeting Russian banks’ import of foreign cash into Russia.
QUESTION from Invest Future Project:
The Bank of Russia has said many times that the key driver for the drop in the ruble is the combination of shrinking exports and growing imports. However, there is another driver — a noticeable correlation between transactions in which foreigners sell unfriendly countries’ assets in Russia to Russian companies and the fall of the ruble exchange rate. Did the Bank of Russia assess the impact of these transactions, and, if it did, was that impact deemed meaningful indeed?
Yes, we certainly assess all factors, and, consistent with our assessment, the key factor was the changes in exports and imports. While the movement of capital has an impact on the exchange rate, the factor you mention — the transactions related to approvals issued by the government commission supervising sale and purchase transactions of such shares — have dropped, rather than rose, and were kept to a minimum between May and June. This factor is therefore not relevant for the exchange rate movements we have seen in recent months.
QUESTION from Izvestia:
When I attended the Summer Macroeconomic School in St Petersburg, I found out that the Governor had never cast her tie-breaking vote at the Board meeting. Given the split of opinions this time, did you also opt out of exercising this right? Is this option potentially possible in principle, or do you always reach a clear consensus?
And question two, please. At the St. Petersburg International Economic Forum, Minister Siluanov told us that under a decision by the Subcommittee on Strategic Foreign Investments, buyers of exiting companies subject to the discount would be forced to contribute 20% of their shares to the exchange, which was a Bank of Russia proposal. The question I have is, does the Central Bank want to propose that similar practices extend to Danon and Baltika, inasmuch as they are large companies and this move could support our stock market, including by rechannelling some funds from consumption to investment?
On the subject of our decision making process, we usually keep this procedure undisclosed, at least for now. We indeed seek a consensus, and the fact that a number of options were on the table does not suggest that we somehow determined them by voting. We had a detailed discussion of the options for the key rate increase, their pros and cons. There was no need to use the casting vote.
Perhaps you have any further comments on this, Mr Zabotkin?
As another person in attendance, I can confirm that there was indeed a very broad consensus today in support of the final recommendation by the Monetary Policy Department — increase the rate to 8.5%. Admittedly, this week’s discussion highlighted differing opinions, and among those was the option of the
As regards floating shares on the exchange and essentially a free float, we welcome any measures supporting this trend. We have a very low free float, and this is a condition laid down by the government commission that makes such decisions.
As regards this specific transaction, it is difficult for me to comment now, but in principle we support the totality of measures that encourage our companies to raise more funds in the capital market since very often they finance their business expansion — new projects — by raising debt and obtaining loans, but we underutilise the potential of the capital market. In our opinion, we have yet to unlock its potential.
QUESTION from Slozhny Protsent Project:
When and to what extent is the weakening of the ruble between late June and early July likely to feed into the consumer price index? What is the Bank of Russia's assessment of the pass-through effects? Roughly speaking, how much and how soon do prices grow when the ruble weakens, for example by 10%, for good measure?
My second question is about the digital ruble. What does the Bank of Russia make of the public response to the digital ruble project? Is the Central Bank ready to admit that there is a noticeable share of public scepticism over this initiative? If you agree, what do you intend to do about it? If you disagree, why do you not intend to?
As for the pass-through effect, our estimates show that a 10% weakening of the ruble sends annual inflation higher by about
First, as I have said, the additional contribution to inflation does not come from the exchange rate change as such, but its deviation from the expected change in the exchange rate that preceded the moment of ruble weakening. Last year, I will say it again, we saw a strong strengthening in the ruble, but many market participants had different expectations for 2023, and our polls show that the ruble will be weaker than in the second half of 2022. The pace of the pass-through effect is also driven by import inventories. We had built up large inventories last year, on the back of a fairly strong exchange rate of the second half of the year. This does not scale down the overall pass-through effect but rather elongates the process.
Third, the very movements of the exchange rate, especially at the moment, have a strong correlation with the movements of domestic demand, which affect imports and through them feed into the exchange rate. The extent to which the change in the exchange rate is associated with this factor is part of the total inflationary pressure driven by expanding demand, that is, it is part of total demand-pull inflation.
Speaking of the digital ruble, yes, we can see the response, and it is only natural that we monitor how households and market participants respond to this new initiative. Yes, people react with some scepticism, I admit, but we have seen the same scepticism towards almost any other new instrument entering the financial market. I remember how many questions people had when we were launching Mir, as well as criticisms and scepticism, and when we were launching the Faster Payments System, which is now used by almost half the population. That was also the case with payment cards themselves. Their launch was met with some scepticism. It is only natural. What can we do? We should explain more, and people will test the products in practice. The digital ruble is not intended as a one-size-fits-all solution. Their use should be absolutely voluntary. People should see it as an additional option, as an option of choice. It can be used by those who want it, and does not need to be used by those who do not. We expect it to be really a more convenient and cheaper instrument for both consumers and businesses and that they will start using it. This is a new opportunity.
QUESTION from Furydrops Project:
You note that demand movements are largely driven by the pace of fiscal spending. In general, what has come into play is a sort of strain related to a mismatch between supply and demand, at least within a short-term period before the medium-term path is reached. Here comes the question. Does the Bank of Russia believe that the risks of fiscal dominance are strengthening? This is question one.
Question two concerns the exchange rate. You have given us a partial explanation of this question as part of the previous one. There is, however, another point you have discussed, which is the secondary effects of the weaker ruble, that is its impact on inflation expectations. How do you think the change in the exchange rate translates into a change in inflation expectations, and how does this translate into the overall dynamics of headline inflation?
Public spending and public demand have had a significant impact, especially last year. At the time, there was a drop in private demand, which was essentially replaced by public demand. What we can see now is the still-high public demand and growing private demand, which has almost hit the late-2021 mark and counting. Doubtless, supply falling to keep pace with it triggers higher inflation.
When public demand remains elevated, to ensure that the resulting gap between supply and demand does not lead to accelerated inflation, we tighten monetary policy, which will have implications for private loans and private demand.
As for fiscal dominance, this is probably a distinct characteristic of countries running large public debts. Its extreme form involves an expanding deficit and public debt, with a concurrent rise in rates, which works to contract lending to individuals, among other things, and the state has to spend increasingly more on public debt servicing. We can see a further expansion in the deficit, so we end up with a kind of spiral. Fortunately, this is not our case. Our public debt is low; we are aware of the Government’s intention to gradually consolidate the budget. Will there be anything more from you, Mr Zabotkin?
Policymakers should always be mindful of fiscal dominance risks in their long-term budget plans.
As regards the secondary effects, there is indeed an interaction, as you correctly said. Exchange rate effects are not the only driver of inflation expectations, but a significant one. Inflation expectations can be influenced by rising prices for highly visible consumer goods. There are also other factors.
Naturally, inflation expectations trigger dangerous secondary effects, when people expect prices to rise across a wide range of goods. These inflation expectations lead to people seeking to spend more quickly for fear of rising prices, which exacerbates this supply and demand gap and fuels inflation. This is exactly what we are concerned about and what necessitates monetary policy decisions intended to limit the deviation of inflation from the target of relatively low and predictable inflation.
QUESTION from Red North newspaper:
When the rouble weakened, some posts in Telegram said that people rushed to stock up on sugar, as before. Those were one-off cases, and there is no buying fever at the moment. Still, what do you think should people worrying about their savings do given this news background?
On sugar prices, they are indeed very volatile. Going by historical data, sugar prices grew last March, propelled by soaring demand, and posted a marked drop in the course of the year. In recent months, their growth persisted, but the pace moderated against last June.
I understand though that your question is not so much about sugar but about consumers hoarding goods for fear of rising prices. Yes, this sometimes occurs in response to ongoing and observable price growth. In fact, this is what we call elevated inflation expectations. Let us remember 2015, the start of the pandemic, and last year. People rushed to stock up on medical masks, buckwheat and home appliances, but thereafter prices for these goods showed a strong decline. What does it all suggest? Low inflation is an environment in which no further growth of prices is expected after they have soured.
The focus of our monetary policy is keeping the overall price consistent with the target. We cannot influence the prices of individual goods or services at all times since they are influenced by supply and demand in individual commodity markets. Still, we rely on the policy of maintaining overall price stability we are conducting to ensure that even a short-term fluctuation in an individual product price does not trigger an unexpected rise in the overall cost of the consumer basket or undermine the purchasing power of household incomes and their savings. This is the focus of our policy.
QUESTION from Reuters:
You give the examples of how demand gained strong support from domestic tourism and car purchases. Would you admit though that those may have been short-lived factors of the summertime? That is, moving forward, this strong demand may well fade away. On the other hand, analysts’ view is that your decision was first of all driven by the weakening of the ruble, which forced you to up the rate by 100 basis points, rather than the 50 basis points the market had expected.
As for the weakening of the ruble, is the Central Bank still monitoring the sale of export revenues? It is thought that exporters are holding on foreign currency, accumulating it in their foreign account balances. What would you comment on it?
Another point here. According to the President’s instruction, proposals regarding foreign currency regulation are due to be submitted by 1 August. What updates may be expected? Can you tell us what is the Bank of Russia expected to come up with?
First, on the weakening of the ruble. This is indeed an impactful factor, but not the key one. In our view, the key factor now is excessive demand relative to potential supply, coming as a result of supply-side constraints, which I have mentioned, including labour shortages.
Speaking of the short-lived factors, when prices rise across a wide range of goods, some goods and services go up in price more, and some less. The fact that rising costs or supply shortages easily pass on to prices is an indication that demand in a number of sectors is high.
Mr Zabotkin, perhaps you would like to comment on that?
Let me say once again that a monetary policy decision is always based on a holistic view of the forecast, rather than on individual factors. It is true that a change in the inflation forecast comes as a result of exchange rate trends, among others, but this factor is assessed in conjunction with all the rest of incoming data. On this point, let me make reference to the Governor’s statement: exchange rate movements in large measure reflect the dynamics of imports, that is their growth. The growth of imports, in turn, is a function of domestic demand, and, in principle, of it only — unless we have physical restrictions on imports.
If this is the case, exchange rate trends actually provide us with much information about demand trends, which is important to bear in mind. That is, it is clear that the exchange rate says more than just this: it signals what is happening in terms of both exports and capital operations. As regards the component in exchange rate movements that is driven by imports, this component is the consequence of demand, and this is what we respond to.
Speaking of exporters selling their revenue, yes, our monitoring is ongoing. There are several factors impacting on the sales volumes of exporters in the foreign currency market. With part of their export revenues being converted into rubles, importers [of Russian products] sell foreign cash in the market for rubles and then pay for our exports — in rubles. On a pro rata basis, the foreign currency component of export revenues entering the domestic market is unchanged. What we have seen is a drop in export volumes.
We also analyse the cash holdings that exporters keep directly in their accounts abroad. According to our data, they total just 1% or less of export revenues.
Regarding foreign currency regulation and the change proposals, you remember how last year's restrictions evolved: at an early stage, very tight currency restrictions were introduced and then they were gradually liberalised. Nevertheless, we have accumulated a large stock of such restrictions. They provide for exceptions and decision making procedures. They are complicated, and it is quite difficult for business to handle them. Some of your questions today were about what is allowed and what is not. We are now taking stock of the whole package of measures in terms of their effects. The Bank of Russia’s position on these restrictions is to keep only those that are essential as response measures. We believe that the rest should be lifted to provide businesses with plenty of opportunity and freedom to build new logistical routes and relationships with new business partners and customers.
QUESTION from Vedomosti:
Among reasons for the weakening of the ruble is the substantial rise in its share of export settlements, some analysts believe, which has brought about a drop in the supply of foreign currency in the domestic market. Does the Bank of Russia share this view? From this, does the Central Bank plan to provide market players with regular updates on one-time capital movements in the foreign exchange market, for example, when non-residents exit or banks close their currency positions?
My second question is about mortgage loans. Thanks to the higher key rate, subsidised mortgages are becoming more lucrative for banks. On the one hand, this type of loans will come with better margins, but households, on the other hand, are facing a wider difference between the rates on subsidised mortgages and the market rates. Can you see the emergence of new risks in the real estate market, for example the risk of a growing price difference between new builds and existing homes?
Speaking of the implications of the ruble being used in export settlements for the exchange rate, following up on my answer to the previous question, importers [of Russian products] have to sell foreign currency and buy rubles — to pay in rubles. Therefore, we assess this to have a generally neutral effect. For all the impact it involves, it remains neutral overall.
With regard to disclosing capital flows, this issue is on the agenda, and we are looking into the matter to see how disclosures could be made more detailed. We have not had any plans so far.
It would make little sense to expect the central bank — any central bank — to present its real-time interpretation of capital movements since this type of assessment is only possible after a more or less lengthy period of time. This disclosure on a quarterly basis is available in balance of payments statistics, to the extent we consider feasible in the current environment.
Now on to mortgages; in our opinion, the pace of their growth is very high. As for the subsidised mortgage programme and the arbitrage of rates, it is the Government that sets the parameters of subsidised mortgage loans. If we receive any change proposals, we will be willing to discuss them with the Government. As for the price gap between the primary and secondary markets, this is indeed a matter of concern. A gap that large creates risks, especially for mortgage borrowers. In our opinion, the key contribution to this gap was made by developer-subsidised mortgage programmes. Since such programmes have been in fact rolled back by now, so we cannot see any further driver of growth in this gap. There are so-called marketing schemes, which we also analyse in terms of implications for the primary and secondary markets. To date, we have not seen any new system risks here.
QUESTION from TV channel NTV:
The sanctions unveiled yesterday suspend the operations of UnionPay cards issued by Tinkoff Bank and Bank Solidarnost. Clearly, in August — the peak holiday season — people will need to take more cash with them, perhaps much more. Is there enough foreign currency in the country to meet this demand? Does the Central Bank, perhaps, intend to introduce any temporary measures?
No, we do not intend to introduce any further temporary restrictions. There is no reason for that. Certainly, there are difficulties with payments. Sanctions of this type complicate settlements for people at large, including tourists. However, we are in dialogue with many countries to expand the acceptance of Mir cards, and, otherwise, the use other settlement systems — for customer convenience. Doubtless, we recognise this problem; it is the result of the sanctions.
At this moment, the exchange rates of foreign cash are overall very close to non-cash rates. This means that the whole imbalance of the past spring had run its course by autumn.
QUESTION from Prostaya Ekonomika (Telegram channel)
In recent months, some Russian banks have been offering deposits in currencies that are exotic for domestic investors, for example Indian rupees and dirhams. At the same time, neither rupees nor dirhams are traded on the Moscow Exchange. This may bring additional risks for such depositors. How does the Bank of Russia approach the emergence of deposits in unusual currencies, and does it plan to become involved in this process?
Indeed, in line with currency regulation of a number of countries, some currencies are not traded on the Moscow Exchange. As for foreign currency deposits, just as I said, such depositors take on the additional currency risk they should be aware of. I will repeat myself, this is largely similar to investment. Although it is a deposit and a type of savings, it is in many ways akin to investment given the more unpredictability factors related to exchange rates and regulatory decisions in foreign jurisdictions. Furthermore, as always, it is necessary to take into account the risk of yield — if it converts into the national currency — being eaten up by the buy and sell spreads of foreign cash transactions. All these effects should be calculated before opening such foreign currency deposits. Also, by force of the restrictions I have mentioned, foreign currency deposits are treated essentially as ruble deposits which are exchange rate-indexed. This is what depositors should also realise.
QUESTION from Moscow 24 TV channel:
How much can, in your view, this rate hike cool the mortgage market? How much cooling does it need? And question two, please. A few months ago, we discussed developer-subsidised mortgage programmes — the so-called ‘hell-knows-what schemes’ [Russian: черт-те знает какие схемы]. By the way, the phrase went viral. Now the banks have switched to a seemingly new scheme: the consumer pays a commission and lands a reduced interest rate level with the market. According to the Central Bank, although this arrangement does not affect the price of new builds, the regulator will monitor the developments no matter. Would you please clarify the change in the regulator’s approach to this problem, in the context of the rate increase and given that banks are aiming to ramp up such sales? Don’t you think the option of buying a rate is something, as it were, flawed?
First, affordable mortgages are an essential driver of affordable homes, but it is imperative that growth in mortgage lending does not occur on the back of high-risk loans which borrowers are unable to service out of their income. Such individuals find themselves in trouble: they are debt-laden and unable to service their debt.
Second, we must prevent this rapid growth of mortgages from translating into rising costs of housing and thus undermining its affordability. These are the two basic principles that are very important to us. Given that mortgage lending is now expanding fairly rapidly, we are making efforts to limit this expansion for high-risk borrowers through our special, so-called macroprudential, measures (including the ratios), which apply to overindebted consumers, based on their debt loads and the estimate for an appropriate down payment. Unfortunately, we record unfair practices in the mortgage market now and then, as with unsecured consumer lending. We fight against them and analyse them from different angles, first, from the standpoint of systemic risks they can potentially carry. In our opinion, developer-subsidised mortgages were marked by absolutely systemic risk. This is also true of other cases of unfair treatment of borrowers who are misled.
The problem you are raising — a loan fee — is essentially an advance interest payment or a loan payment. This does not directly affect housing costs or the gap between the secondary and primary markets, but much depends on how long a borrower wants to repay the loan. The borrower stands to gain if they repay the loan for long enough, longer than the bank expects — which is priced in the interest rate or the fee — usually for about seven years. Vice versa, the borrower stands to lose if the loan is repaid in less than seven years. However, the borrower may not be aware of this, which is why information about such loans is critical. In principle, we do not support any advance payments of this kind, as a fee or a payment for the rate, and we are now advising against such practices, propelling banks to pull out of them voluntarily. We are working together with banks to craft a clear standard of mortgage products, and such that banks themselves would embrace and strictly comply with. If this approach falls through, as I have said, we will go to legislators to tighten bank regulation. On the one hand, to account for various circumstances and preferences, we should enable product differentiation for consumers. On the other hand, we will not tolerate any profit based on misleading. This is the balance to strike, for the reason that a standard universal mortgage product lacks differentiation depending on borrower preferences. That said, should these practices persist to become massive, there will be no other option.
Yes, please, Mr Zabotkin.
On the impact of today's decision on the mortgage rates, the benchmark for the pricing of core market mortgage products is the yield on OFZ bonds with a maturity of
QUESTION from Goodwill (business paper, Smolensk):
How strong is a squeeze on consumer demand right now? Are there any opportunities for an expansion in demand and, if there are, which are they? What are the implications for inflation, going forward?
In our view, it would be a misjudgement to say that demand is squeezed at the moment. Quite the opposite, this year, Q1 household consumption exceeded the 2021 Q4 mark — a pre-crisis level. All the high-frequency indicators including retail sales and commercial services show that growth continued into the second quarter. Our monetary policy is intended to ensure that further growth in aggregate demand is commensurate with production capacity in the economy, with the goal of delivering growth in real consumption in physical volumes. Any growth in demand beyond production capacity will trigger spiralling inflation, since it cannot be covered by increased output of goods and services. Accordingly, our monetary policy aims to prevent expanding demand pushing up inflation.
QUESTION from Frank Media (periodical):
For more than one year, the Bank of Russia has alerted investors to the problem that all web data on issuers must be checked and that anonymous Telegram channels cannot be trusted. In connection with investments, unfortunately, they have shown explosive growth recently, when the official information was unavailable. Yet, we can see the emergence of a different trend, with issuers themselves moving to the dark side and helping speculators. Here is a fresh example. CREDIT BANK OF MOSCOW, listed on the Moscow Exchange, is on the top-tier quotation list. It posts its financial statements in an anonymous Telegram channel, not concurrently with or after the official submission in the disclosure centre or on its website, but four hours ahead of that. This is the question: what does the Bank of Russia make of such communication between issuers and their investors? Might there be a need for updates in legislation governing manipulation and insider information to match the reality?
We intend to look into specific cases. I certainly agree that the publication of insider information ahead of official disclosures is unacceptable.
QUESTION from Forbes:
Under a new law, foreign banks of friendly countries are allowed to be direct participants in foreign currency trading on the Moscow Exchange, to guarantee the liquidity of their national currencies. What is the key idea of this legislative proposal and its purpose? Can this help lower pressure on the ruble?
The key purpose of this direct access to currency trading without intermediaries, that is, the admission of brokers and banks from friendly countries, is to increase the liquidity of exchange-traded instruments and streamline settlements in national currencies. We expect soft currencies to account for the core inflow of such new participants. New players will be subject to requirements similar to those for current trading participants in the foreign exchange market. There are no plans for any additional restrictions or limits: the requirements will be the same.
QUESTION from LawAndFinance Project:
On the St. Petersburg Exchange, Hong Kong funds are now available for purchase, which, according to the exchange, are kept in friendly infrastructure. How safe do you think is investment in such securities, given that the investor cannot see the full custody chain and cannot assess infrastructure risks?
It is only natural that the least risks involve trading in Russian securities in the Russian infrastructure. Foreign securities accounting and custody through friendly infrastructure reduce the likelihood of such infrastructure risks but do not completely eliminate them. Therefore, investors still need to analyse and assess the risks of such investments. We continue to work with market participants to ensure that they properly inform investors about the risks that such instruments involve. In other words, these risks cannot be fully eliminated. Also, since last year we have been making efforts to minimise the infrastructure risks of investing in foreign securities, to the effect that securities of unfriendly issuers are now unavailable for non-qualified investors. New foreign instruments are admitted to exchange trading provided that they are served by friendly infrastructure. The market participants must notify investors of the risks related to such investments.
QUESTION from Kommersant:
The forecast expects a drop in 2024 imports on 2023. Based on this, what can we say about the nature of imports in 2023? In the next few years, are imports set to restock the imported inventories that have been running low this year?
I have to admit that some of the developments you are describing are in place. Their impact is not broken down in our forecast. The logic is that the growth in imports was rapid, including on the back of expanding domestic demand, with the economy overcoming the bottlenecks of many import restrictions. Indeed, accounting for the change in the exchange rate, the physical volumes of next year’s imports are likely to be slightly lower than this year. Still, based on the projected balance of payments in nominal terms, next year’s imports are broadly consistent with this year’s in dollar terms. This is a negative value. This suggests a drop in the contribution of imports to GDP, which is a real variable, but in nominal terms, in dollars, it is unchanged in 2024 from 2023.
Thank you for your time.