Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 15 September 2023
Today, we have made the decision to raise the key rate to 13% per annum.
The key rate top-ups since July are the response to the materialisation of inflationary risks, including due to the impact of the exchange rate. We have updated our macroeconomic forecast and are relying on it to adjust the level of the key rate needed to achieve the inflation target of 4% by the end of next year. Considering the current conditions, we need to maintain tight monetary policy for a longer period to bring inflation back to the target.
I would now dwell on the reasons behind this decision.
Firstly, about inflation.
In July, current price growth significantly sped up. In August, growth rates edged down, while price pressure was increasingly caused by trend components. Price increases accelerated across a wide range of products. Core inflation indicators continued to move up. Such goods as cars, clothing and footwear, household appliances, and electronics, were an important contributor to current inflation as prices for them depend on the exchange rate.
The ruble weakening was provoked by several factors simultaneously. I would like to detail them. Foreign currency earnings contracted due to the slump in the value of exports during this year. Concurrently, the demand for imports expanded. This was largely caused by the proinflationary pressure of higher domestic demand resulting from expansionary fiscal policy and a considerable acceleration of lending growth. The increase in the demand for imports in Russia amid the reduction in export revenues entailed the depreciation of the ruble.
Moreover, as ruble interest rates were not sufficiently high, people’s propensity to make ruble savings was quite low, whereas companies were raising ruble loans not to spend foreign currency liquidity. The demand for foreign currency was also boosted through transactions on the financial account, specifically by the companies purchasing Russian assets from foreign owners. This also exerted pressure on the ruble exchange rate.
Contrary to popular belief, the currency composition of export payments as such does not put any notable impact on exchange rate movements. Even when exports are paid for in rubles, this normally means that the buyer previously purchased these rubles, that is, it sold the related amount of foreign currency. The only exception is cases where foreign companies paying for Russian exports in rubles, in the conditions of relatively low interest rates, prefer to raise ruble loans rather than sell foreign currency.
Despite the dynamics and high volatility of the exchange rate this year, financial markets were operating as normal having no problems with liquidity. Therefore, we did not see then and do not see now any financial stability risks. The rapid movement of the exchange rate could not be regarded as such a risk. However, it became an additional factor provoking the increase in inflation and inflation expectations. We raised the key rate exactly to mitigate the impact of these factors.
Considering the actual acceleration of price growth, we have revised our inflation forecast for this year upwards to
Secondly, as regards the economy.
In the second quarter, GDP rose by 4.9% year-on-year. Such a high growth rate means that the economy is recovering after last year’s downturn. Besides, according to our assessments, the part of the economy focusing on domestic demand has generally exceeded the level of late 2021. We expect the expansion to be more moderate in the second half of the year, which is natural after a period of fast recovery growth.
The economic growth rate is limited by resource constraints, specifically those related to workforce. The situation in the labour market remains tight, particularly in labour-intensive industries, including metallurgy, machine building, and chemicals. Our report Regional Economy analyses the regional labour markets in greater detail.
We have kept the GDP growth forecast for this year unchanged at
Thirdly, as regards monetary conditions.
The financial market has started to adjust to monetary policy tightening. However, this adjustment has not yet influenced price conditions adequately and has had almost no impact on lending dynamics. Our today’s decision is aimed at intensifying and accelerating this adjustment, amongst other things.
As to the deposit market, households are transferring their funds from current accounts into time deposits. We expect this process to speed up as a result of a further rise in interest rates on ruble deposits.
The credit market’s response is slower, which is mostly associated with the time-lag effect of the transmission. First of all, banks currently continue to issue loans under the earlier approved applications. Second, after the notable increase in the key rate, borrowers are making a last-ditch effort to raise loans now, before banks increase interest rates further.
However, in addition to the time lags, there are also factors that are weakening the effect of our decisions. In the first place, these are elevated inflation expectations that are reducing the tightness of monetary conditions. Borrowers compare credit rates with their inflation expectations. Those assuming that high inflation will persist for a long time and their nominal incomes will increase are often ready to raise loans at high interest rates expecting that inflation will depreciate their debt.
Furthermore, extensive subsidised programmes, primarily in mortgage lending, support the fast expansion of lending. For the key rate to have the appropriate effect, it should be raised more significantly than if there had been no such programmes.
Another possible driver of high credit activity is related to expectations by market participants. Some of them expect the same scenarios as in 2014 and 2022 when we switched to monetary policy easing quite quickly. However, the current cycle differs from the previous ones. The considerable key rate increases in the past were largely associated with financial stability risks. When these risks diminished, we lowered the key rate. Now, the situation is totally different. We have raised the key rate due to materialised inflationary risks and will keep it high for a sufficiently long period until it becomes clear that the inflation slowdown is steady enough.
I would like to say a few words on the yield curve of federal government bonds. It is the reference point for credit and deposit rates in the entire economy. Hence, it is an important indicator for us. During periods of disinflation, this curve usually flattens or even becomes inverted, that is, long-term interest rates become lower than short-term ones. This slope of the yield curve indicates tight monetary conditions that have formed and should cause a slowdown in inflation.
After the unscheduled key rate increase and our communication, the yield curve of federal government bonds has almost flattened. The key rate is directly impacting short-term interest rates. Our today’s decision will help increase the slope of the curve through a rise in short-term interest rates. As a result, lending growth rates will reach the level that is coherent with the achievement of the inflation target next year.
Now, I would like to speak of external conditions.
Global economic growth continues to decelerate. More moderate growth rates abroad will limit the rise in prices for Russian exports. Export quantities are increasing more slowly than we assumed in July. Considering the actual data, we have revised our forecast of exports downwards. Nevertheless, taking into account the decision made by OPEC+, we have slightly raised the oil price forecast for 2023 and 2024. The medium-term forecast of oil prices has remained unchanged.
The forecast of imports has also been decreased as we expect imports to adjust to the earlier ruble weakening and more moderate growth rates of domestic demand. As a result, the current account will expand further on, compared to the minimum levels of the third quarter of 2023.
I will now speak of possible risks to the forecast.
The ratio of risks is still shifted towards proinflationary ones. A matter of special concern is the possibility that inflation expectations might stay elevated inducing secondary effects for inflation. Moreover, geopolitical risks persist, just as the probability of a harder landing of the global economy, which might affect the demand for Russian exports and the exchange rate. Another focus of attention is the impact of fiscal policy.
Winding up, I would like to comment on monetary policy prospects.
According to our baseline scenario, the average key rate during the remainder of this year and in 2024 will equal
Thank you for attention.