Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 15 September 2023
Good afternoon,
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.
Q&A for the Media
QUESTION from Interfax:
The Russian President recently noted that exporters were repatriating foreign currency earnings slowly and a number of Russian companies were going to hold assets abroad, which was actually like falling into the same trap. Do you agree that exporters are now repatriating foreign currency earnings slowly? How large is the share of foreign currency earnings sold by exporters, according to recent data? Do you still believe that Russia should not reintroduce the requirement to sell foreign currency earnings? Don’t you think that it is now time to specify certain rules in writing or do you rather think that oral agreements with exporters are sufficient?
My second question continues this topic. As announced by the Ministry of Finance, there is currently a discussion about the transformation of foreign exchange controls where the Ministry of Finance takes a rather conservative view. Is the Central Bank still more liberal in this regard? Do you think that all the measures, except the tit-for-tat ones, should be cancelled and when do you expect to reach a consensus on this issue? How long will the discussion last?
ELENA FEDOROVA:
Colleagues, if you have any additional questions on this topic, please ask them now to save some time.
QUESTION from Fomag.ru:
I’ve got an additional question, although put a little differently, with a slightly different emphasis. Is the strengthening of the ruble that we have been observing associated directly with the fundamentals or, in effect, exporters’ or speculators’ actions?
QUESTION from Mosckovsky Komsomolets:
As regards this question, could you please specify the regulator’s view of the ruble exchange rate in general? Is there any threshold, let’s say 100 rubles per dollar or below this threshold, above which the Bank of Russia will start tightening the foreign exchange restrictions? If yes, what is this threshold and what are the first measures to be taken by the Bank of Russia when it is exceeded?
QUESTION from RBC:
My question is also about the foreign exchange restrictions. Andrey Kostin admitted or, rather, suggested that the withdrawal of rubles should be restricted. What is your personal opinion about this initiative and how seriously is it being discussed by the Bank of Russia?
QUESTION from Vedomosti:
I would like to ask an additional question about speculators. Will the Central Bank take or discuss any measures, sanctions or mechanisms to counter speculators?
QUESTION from the project Bitkogan:
I’ve also got an additional question. Beginning on 14 September, the Bank of Russia increased foreign currency sales nearly tenfold. Why hasn’t this strengthened the ruble?
ELVIRA NABIULLINA:
Indeed, we are currently discussing the foreign exchange restrictions. This is largely a decision of the Government. I will now talk on the Central Bank’s position.
You see, where there is a need to influence the capital flows affecting the exchange rate, this should be done through economic rather than administrative measures. I believe that administrative measures should be limited to mirroring measures taken in response, in the first place. As to the economic measures, this implies that we should increase the attractiveness of ruble savings and encourage companies to sell foreign currency earnings to cover their current expenses, including for taxes, wages and so on, rather than raise excessive loans.
This is true, last year when the crisis peaked, we really introduced multiple measures. They could produce certain results, I mean the foreign exchange measures. Nevertheless, we introduced them together with other measures. Our analysis shows that the result was mainly associated with the rapid response of monetary policy and a sharp rise in interest rates. Later on, this was supported by export and import dynamics. As you remember, Russian exports and export earnings surged, whereas imports plummeted.
It is essential to comprehend that administrative restrictions, provided they are efficient (I believe that it is impossible to identify their effect last year quite precisely as long as there were other tough decisions in other areas as well), if we assume that they are efficient, they are normally efficient only during a certain limited period. The longer they are in place, the lower their performance will be. They are circumvented. This is evident from the experience of the late 1990s and early 2000s. Today, the more so, as we are now in a situation when companies have to arrange various complex chains for foreign trade and payments. These chains also allow them to circumvent the restrictions. Moreover, these restrictions might involve difficulties and barriers for foreign trade, purchases of required goods, services, components, and so on. If we seek to eliminate all loopholes, as for instance in your question about restricting money transfers in rubles abroad, these inefficient restrictions will have a snowball effect. We will be closing some loopholes, whereas businesses will be finding new ones, and this process will never end. Administrative costs for businesses, their low performance and, ultimately, the passing-on of these costs to consumers will only become augmented. I would give a specific example why the standard measures that are being discussed might turn out to be inefficient.
What is the main topic of the discussion? For instance, the return to the requirement to sell foreign currency earnings. By the way, we’ve got a considerable proportion of earnings in rubles already. The share of foreign currency earnings being sold by exporters is almost the same in the market and, although there is a certain volatility, this share remains sufficiently large. However, having sold their foreign currency earnings, exporters are allowed to buy back the amount they need. Ultimately, this only increases turnover in the foreign exchange market, that is, sales and purchases of a particular foreign currency, whereas the ratio between the demand for and supply of this currency will not alter. Furthermore, this will involve difficulties for companies that need foreign currency earnings to purchase imported equipment and extra costs for an additional conversion, whereas the effect on the exchange rate will be minor.
The second question is about repatriation of foreign currency earnings, that is, transfers of foreign currency funds from foreign to Russian banks. What does this mean? This does not mean that this will be the value of an increase in the supply of foreign currency in the Russian market because the amount of foreign currency will not grow regardless of whether these funds are held with foreign or Russian banks — these funds will just be kept in foreign currency accounts with Russian banks and have no effect on the exchange rate.
By the way, I have spoken of the analysis, that is, we are analysing the balance of payments in detail. As you remember, the Government first introduced tough restrictions last year, including the requirement for repatriation and selling part of foreign currency earnings, and then eased them. We have analysed the capital flows over these periods: they are not sensitive to such requirements for repatriation and selling export earnings and were not impacted by these restrictions, changing for other objective reasons, including the balance of trade and the perception of uncertainty in the economy. Actually, the cancellation of these restrictions had no effect on the objective increase in repatriated and sold export earnings.
I would like to give another comment regarding the transfer of ruble funds abroad. This is similar to the above-mentioned measures: money transfers to foreign banks as such do not create the demand for foreign currency. Such demand is created when foreign currency is purchased. It is only possible to influence the demand by making rubles more attractive as a store of value. By the way, it is not important for the exchange rate whether rubles are converted from a Russian or foreign account. What is important for this conversion is its drivers.
Besides, as I have already said, it is essential to factor in complicated logistics chains. Indeed, transactions today are partly carried out through traders. If it is more cost-effective to keep part of foreign currency funds with traders for a longer period, the requirements for repatriation and selling export earnings will not eliminate the problem. They are not applicable to non-residents that are beyond the Russian jurisdiction and we have no administrative controls over them. Therefore, I believe that this issue can only be addressed through economic benefits and an adequate cost of credit. Besides, indicative prices used for taxation are important, maybe not to reduce, through transfer pricing, the need for selling foreign currency to make tax payments.
I would like to provide a few figures. According to recent data, a considerable share, namely 42%, of total export earnings is already in rubles. Hence, the foreign currency share of earnings is simply declining.
Furthermore, as to the Russian exporters who have been keeping their foreign currency earnings in foreign accounts, these amounts have not been changing actually, regardless of the foreign exchange restrictions. These amounts account for less than 1% in overall foreign currency export earnings. In other words, there are no traders that you’ve mentioned. Besides, companies continue to sell nearly 90% of repatriated foreign currency earnings.
As to the outflow of capital — since there have been frequent questions about the outflow of capital as a factor of the ruble weakening — indeed, it is one of the factors, but it is not among the most significant ones, in our opinion, especially that the outflow of capital this year was much smaller than over the previous year. The balance of payments, the financial account net of reserves totalled $28.6 billion over the first eight months of the year and $195.1 billion over the previous year. The value of net foreign assets purchased this year is lower as well. This does affect the exchange rate, but definitely to a lesser extent than the other factors. The exchange rate has been weakening due to multiple factors, including exports and imports. In our opinion, this is exactly such overheated, elevated domestic demand that entails higher ruble-denominated demand for imports. This is also weakening the national currency.
As regards the psychological threshold for the ruble exchange rate, we do not have it. We have a floating exchange rate, although we certainly take into account that its weakening is a proinflationary factor. By raising the key rate, we have been responding to the increase in inflation factors, including the exchange rate as a significant one, although not only to the exchange rate, but also lending conditions, and others.
This is probably everything I’ve got to say about this.
I would like to ask Mr Zabotkin to answer the question why the ruble has not strengthened despite the accelerated sale of foreign currency by the Central Bank.
ALEXEY ZABOTKIN:
Actually, this demonstrates that our decision to redistribute the operations mirroring investment made from the National Wealth Fund (NWF) is not aimed at influencing the exchange rate. Its objective is to ensure that the supply of foreign currency in the market is adequate during a specific period of such a potential surge in the demand for foreign currency associated with redemption of a large issue of Eurobonds of the Ministry of Finance. As a result, we can see that the exchange rate has remained the same, although the redemption will be tomorrow and, accordingly, there is a certain number of investors wishing to continue to make investment in foreign currency and, after the redemption of the dollar-denominated Eurobonds, to purchase foreign currency. Therefore, what we can see is that this redistribution of our scheduled operations over time does not have any specific effect on the exchange rate but is rather smoothing out its fluctuations.
ELVIRA NABIULLINA:
It does not change the overall supply of foreign currency because this is just a redistribution of this supply of foreign currency over time.
QUESTION from TASS Agency:
My first question is about mortgage lending. Can you see any signs of overheating in the mortgage market and will the Government’s measures, in particular the increase in the down payment for subsidised mortgages, help cool down the market?
The second question is as follows. Why the upper bound of the forecast growth range of the Russian economy has been lowered for the next year?
ELVIRA NABIULLINA:
Indeed, mortgage lending has been increasing very fast. As of 1 September, its growth reached nearly 30% in annualised terms. The faster expansion is driven both by subsidised programmes, as we can see that this is the share of subsidised programmes that has been rising in total mortgage lending, and by the issue of mortgages to riskier groups of borrowers, which is critical and is a matter of concern for us.
In particular, mortgages issued to people whose debt service-to-income ratios exceed 80% almost doubled over the past two years. We can see an increase in mortgages with a low down payment (less than 20%). Currently, such mortgages account for 63%. We are certainly concerned about this. This is the reason for not only the persistent gap between prices for new and existing housing which is still about 40%, but also for the problem of overpricing of collaterals for mortgages in the new housing market, with all that it implies.
Hence, from 1 October, we will significantly tighten the macroprudential buffers and set the macroprudential buffers at a prohibitive level for the riskiest mortgages, primarily in the new housing market, exactly in order to take into account the overpricing observed in this market. We expect that this measure will improve the structure of lending and ensure more balanced growth rates of mortgage lending corresponding to income growth rates in order to avoid the risks of ‘bubbles’. We support the Government’s decision to slightly tighten the requirements for subsidised programmes and raise the down payment from 15% to 20%. We will monitor how efficient this tightening will be, coupled with the macroprudential buffers that we expect to be much more efficient. If needed, we are ready to toughen the macroprudential buffers even more.
As to your second question about the decrease in the upper bound of the forecast GDP growth range, I would like to ask Mr Zabotkin to answer it.
ALEXEY ZABOTKIN:
Indeed, the forecast of GDP growth for 2024 has been revised downwards from
QUESTION from Abakan.ru:
Today, you raised the key rate again. Is it really possible that the expected effect of this increase will compensate for its negative implications for the economy, such as low affordability of loans for individuals and businesses?
ELVIRA NABIULLINA:
As regards loans, I would not say that their affordability is low. Lending has been expanding quite quickly. We observe very high growth rates of both household lending (including unsecured consumer and mortgage loans) and corporate lending.
It is crucial to prevent a situation where demand that has rebounded simply translates into rising inflation, into a faster increase in prices for goods and services consumed by Russians as, otherwise, this will not boost the economy but will only speed up inflation. Therefore, it is critical to make timely decisions in this regard in order to ensure a balanced growth rate of the economy. We have adjusted the forecasts, but we can see that the economy will be demonstrating positive growth rates over the entire forecast horizon. We expect the effect that is directly related to the avoidance of faster inflation and the return of inflation to our 4% target, which is essential to preserve the purchasing power of households’ incomes and savings.
ALEXEY ZABOTKIN:
According to our forecast, the expansion of lending will slow down compared to
QUESTION from Frank Media:
Ms Nabiullina, you have rightly noted that the Government has slightly tightened its approach to subsidised lending that we’ve learnt a lot about with surprise from today’s press release. Frankly, analysts have been writing that the measures taken by the Central Bank in October also have a limited effect on the mortgage market. In this context, my question is as follows. Will this market ultimately need quantitative restrictions that you previously admitted or will it be able to avoid them?
I’ve got another brief question. Could you please comment on the restrictions on the withdrawal of rubles?
ELVIRA NABIULLINA:
I have already commented on the second question, but will repeat once again. In my opinion, this measure will have no effect.
As to the measures in mortgage lending, actually, we have already tightened the macroprudential measures quite strongly and will be monitoring the results. If needed, we will tighten them further, but we are still not entitled to introduce quantitative limits, unfortunately. According to law, we may do this in consumer lending, but not in mortgage lending. We believe that, generally, it would be useful to have two sets of measures, including both risk weight add-ons and such quantitative restrictions as their effects slightly differ. I think this would be useful for risky mortgages, but we do not have such an option today. We may only toughen the buffers related to both the percentage of the down payment and borrowers’ debt service-to-income ratios.
QUESTION from Kommersant:
Judging by the Central Bank’s comments, economic activity over the last six months has been higher than the path that would ensure steady growth. On the other hand, judging by the same logic, its level is insufficient to ensure adequate supply that could meet domestic demand in the economy. Does the Bank of Russia believe that such a paradoxical situation will end within six months and in what way — through a decline in business activity or a stabilisation of demand?
ELVIRA NABIULLINA:
It is essential to remember that production capacities in the economy are changing much more slowly than fluctuations of the economic conditions influencing demand. Hence, if demand surpasses supply — and this is exactly the case — the economy should adjust and return to a balanced and steady growth path (the indicator of which is low inflation conforming to the target) through more moderate growth rates of demand. Besides, I would like to emphasise that overall business activity should not necessarily decline for this. It will be increasing more moderately for a certain period because the current growth rates of demand surpassing the capacities to ramp up supply inevitably entail a further acceleration of inflation. Eventually, we assume that, by the end of the forecast period, the economy will be growing at these balanced rates that we estimate at
To the contrary, if the monetary policy response to overheating in the economy is delayed, as we can see from the experience of foreign countries, this might require a reduction in business activity or even a recession. Therefore, it is crucial to respond to inflationary risks, risks of overheating in a timely manner.
I would like to reiterate that our forecast for 2024 assumes positive growth rates of GDP.
QUESTION from Reuters:
Could you please say what is the percentage that the ruble weakening accounts for in the inflation forecast for this year?
My second question is as follows. What key rate decisions did the Board of Directors consider today?
ELVIRA NABIULLINA:
According to our assessments, 10% of the ruble weakening contributes
Speaking of possible decisions on the key rate, we discussed three alternatives today. The first one was to maintain the key rate unchanged and analyse all the lags. We held a non-core meeting today, but we deliberately made an off-schedule update of the forecast because the dynamics of the exchange rate and lending growth rates have altered significantly and now notably exceed the previously forecast figures, let alone external conditions. This forecast shows that we need a higher path of the key rate in order to bring inflation back to 4% by the end of the next year. The second and the third options were to raise the key rate either to 13% or higher. Having discussed all the pros and cons, we came to the consensus to increase the key rate by one percentage point.
QUESTION from the project LawAndFinance:
You’ve said that you considered the alternatives of keeping the key rate unchanged or raising it by 1%, but you’ve also said that the attractiveness of ruble savings should be increased, which could also support the ruble exchange rate. The key rate is currently 13%. Do you believe this level to be sufficiently attractive for households to shift towards ruble savings?
ELVIRA NABIULLINA:
We will be monitoring this situation. This depends on how inflation expectations will be changing since people making decisions to either save or consume compare interest rates with their inflation expectations. This is why inflation expectations are so important. Currently, the data on inflation expectations are available only for August. We will be analysing the developments in September and see from the data to be received next week how households’ propensity to save has been changing. Nevertheless, there are some signs of it already now. The fact that funds are partly transferred from current accounts to interest-bearing time deposit accounts is a certain indicator that the key rate decision is efficient. However, we are still to make sure how adequate these decisions are to be able to properly influence the attractiveness of ruble savings, among other things.
Would you like to add anything, Mr Zabotkin?
ALEXEY ZABOTKIN:
The key rate is essential, but it is no less important how it is ultimately translating into banks’ deposit and credit rates, as well as interest rates in other segments of the financial market. In this regard, a critical component of our today’s communication is the signal that the key rate should be kept at the current level for quite a long period, at least until we see a notable decrease in current price growth rates and inflation expectations. We also expect that this will strengthen the transmission of the key rate to deposit and credit rates.
QUESTION from Argumenty i Fakty:
I’ve got another question to continue the topic. Could you please explain in slightly greater detail why banks are responding so sluggishly to the Central Bank’s vigorous actions towards increasing the cost of funding? From July, the maximum deposit rate has risen by as little as two percentage points. Aren’t the banks behaving this way weakening the efficiency of the Bank of Russia’s policy?
My second question is about mortgage lending. If it is clear that the period of high interest rates will be followed by monetary policy easing, isn’t it the right time now to start issuing mortgages at floating interest rates? What do you think about this?
ELVIRA NABIULLINA:
As regards the pace of the transmission of our key rate decisions to deposit and credit rates, this process almost always progresses with a time lag.
These lags are longer when there are the expectations Mr Zabotkin has mentioned, specifically the expectations that the Central Bank has raised the key rate for a very short period, it is worth waiting for its reduction, and it is thus possible not to increase deposit rates. We have the experience of 2014 and 2020 when we raised the key rate due to financial stability risks and, after they diminished, we started to cut the key rate. Therefore, what we are seeking to do is to stress that the current increase in the key rate is associated not with these risks, but with proinflationary risks that might persist for a long time, and this emphasis should really strengthen and speed up the transmission.
Nevertheless, it is worth noting that interest rates have still responded to a certain extent. Banks are raising their deposit rates not as significantly at a time as the Central Bank has increased the key rate, but this is happening. Hence, we can observe the transfer of funds from current accounts to time deposits, among other things. Credit rates normally respond slightly later. In this regard, it is essential to remember that the proportion of corporate loans at floating interest rates is already significant, less than a half of the portfolio, but this is still a considerable share. The translation to credit rates in corporate lending is much faster if a company is ready to draw down credit lines at these floating rates.
As to floating interest rates you’ve asked about, I believe that floating rates on household loans are not useful. Floating rates can be set for corporate loans. By the way, we also consider that floating risks associated with loans to micro businesses should probably be limited to a certain percentage as well, as long as companies should have qualified specialists capable of assessing interest rate risks. Loans at floating rates seem to be more cost-effective at a moment when the loan is raised because floating rates are generally lower than fixed ones. However, people should remember that an interest rate might change both downwards and upwards and, accordingly, a loan might turn out to be more expensive.
We could observe the problems resulting from floating interest rates in 2022 and made special decisions on subsidising and restructuring such loans. This is why we believe that the issue of floating rates on consumer and mortgage loans should be considered very cautiously. By the way, we could see that banks were interested in providing loans at floating rates exactly during periods when the key rate was low as long as banks could estimate that the probability of a future key rate increase was higher than the likelihood of its reduction. It is clear that this change will redistribute the benefits from households towards banks. We do not support the idea of floating rates for individuals.
QUESTION from Kommersant-Yaroslavl:
Our region has an advanced industrial sector and many enterprises are implementing import substitution programmes. Of course, they need loans for this. The key rate increase will make borrowings more expensive (and jeopardise the success of a number of these plans) and, consequently, reduce supply in various markets, which might entail yet another rise in inflation.
How are you going to address this issue? Would not it be more reasonable, to the contrary, to cut the key rate and create more comfortable conditions for the development of the economy through lending?
ELVIRA NABIULLINA:
A key rate decrease in the conditions when inflation is high, exceeds the target and is accelerating will not reduce the cost of credit because banks issue loans at the interest rates that would not involve depreciation of loans due to inflation. If we cut the key rate amid rising inflation, this will not increase the affordability of loans but rather push inflation even higher, and nothing more. To ensure a comfortable development of the country’s economy, interest rates should definitely be moderate. However, I would like to reiterate that inflation should be slowing down.
The cost of credit and deposit rates, as we have already said, largely depend on people’s and businesses’ inflation expectations. Interest rates can be moderate only when companies, households and banks are confident that inflation will be low. Currently, our surveys show that the main drag on the development and expansion of output is the deficit of labour resources.
Just imagine a situation where a company raises a cheap loan and even purchases additional equipment. Where will it find additional personnel who would work on this equipment and ramp up output? Considering the current conditions, this is only possible by luring them away from other enterprises or industries. In this case, the latter will face a decline in output. Accordingly, the overall effect for the economy will be a close-to-zero change in economic growth. What else will happen in this case? Inflation will speed up. Why? This is because companies will be raising wages to be able to lure workers away from each other. As long as aggregate output in the economy will not be expanding, higher wages will be simply pushing prices higher. This is probably not as obvious at the micro level when every company is analysing the opportunities for expanding its own business, but this works at the macro level. The constraint at the macro level is not money, but rather the existing constraints on available production factors. Our objective is exactly to ensure that interest rates are moderate amid decelerating inflation and that lending growth does not involve risks to price stability where this growth cannot be supported by an adequate expansion of output.
QUESTION from RIA Novosti:
Ms Nabiullina, your today’s rhetoric, including in your personal statement and in the press release following the meeting, was rather tough and you raised the key rate forecast for the end of the year, among other things. Does this mean that you will still raise the key rate further at the two upcoming meetings this year? Aren’t there still any conditions for either stabilisation or easing of monetary policy until the end of the year or at the beginning of the next year if you expect that inflation will most likely slow down to the target only by the end of next year?
ELVIRA NABIULLINA:
We present the forecast of the average key rate for the year, including the level it is assumed to be at from the date of our meeting until the end of the year. This forecast assumes that the key rate might both remain at today’s level or increase. This will depend on the incoming data and on how the economy, inflation and inflation expectations will respond to our decisions.
ALEXEY ZABOTKIN:
I would like to reiterate that monetary policy easing will only be possible amid a steady slowdown of current price growth and a comparable decrease in inflation expectations.
QUESTION from the project InvestFuture:
You have mentioned several times today that there is a period of tight monetary conditions in the economy ahead. In this regard, I am curious to know if there are any plans to support large or not only large businesses whose debt burden is very high. This is my first question. The second question is about unemployment. It is currently at a record low, certainly pushing up wages, which is a proinflationary factor.
Does the Central Bank have any target rate to determine that the risk of low unemployment has diminished or such targets are not set today?
ELVIRA NABIULLINA:
As to supporting large enterprises, the Government has a wide scope, a large number of business support programmes, including through subsidising interest rates, through subsidised lending. The Government will probably support top-priority industries by implementing these programmes.
I would like to stress once again that our key rate decision is aimed at lowering inflation. Eventually, it will translate into more moderate interest rates on loans, primarily long-term ones, that Russian companies need. As to the enterprises that have accumulated large debts, the solution here should be similar to the one for individuals. If people spend over 80% of their incomes to repay loans, this cannot be addressed through another increase in debt burden, through new loans. If debt burden is very high, these loans should be restructured together with the creditors. There are practices when creditors become owners, and so on. However, the situation cannot be rectified through an additional increase in debt for companies with excessive credit exposure, of course, regardless of the level of interest rates. This is a problem that should be addressed using other means.
As regards unemployment, we do not have any target rate for it, but the situation in the labour market is certainly a crucial factor, particularly today, and we do take it into account when making our key rate decisions. We can see that the demand for labour is currently higher than labour supply. As you know, economists use such indicators and terms as an equilibrium level of employment and full employment. This is usually a qualitative judgement as it is quite difficult to measure this level. This is the level of unemployment that corresponds to inflation rising at a target pace. This level can vary across countries. However, we are now facing a situation where demand in the labour market exceeds supply. Of course, this should be taken into account.
QUESTION from the Profinansy project:
My question is about what causes people’s worries.
The inflation rate is 5.5%, but people are concerned that retail price growth is nearly 15%. They have been continuously commenting on various posts about inflation, writing that the inflation rate and retail prices are two totally different measures that are not interconnected at all. This is not only about Russia — this is true worldwide. Thus, when inflation in Turkey is 100%, prices for everything soar threefold or fourfold. Could you please tell us how to deal with this and how this information should be interpreted? Does the inflation rate of 5% imply that goods will become more expensive by 15%? In other words, how should we perceive and comprehend this information? How should people use it?
ELVIRA NABIULLINA:
Indeed, we have been talking about inflation expectations, that is, about the inflation rate expected by households. However, there is also such a thing as observed inflation — we survey households to understand how they are estimating the current level of inflation. Usually, this rate is certainly higher than what is calculated by Rosstat. Indeed, this is happening in many countries. Today, inflation expectations have soared. Observed inflation has notably risen alike. In this regard, it is worth noting that households respond to increases in prices for a specific range of goods and services. As you know, these are housing and utility services, the exchange rate, petrol, and basic goods. Therefore, observed inflation might significantly differ from the official rate. These are predominantly basic goods, and not a broad range of goods included in Rosstat’s calculations where purchases might be irregular, but they are also part of households’ spending.
There is only one solution here — to lower overall inflation, overall price growth rates, which will be followed by a decrease in observed inflation.
However, as you know and as I have also said already, people might measure their inflation themselves — as every household has its own consumer basket — and the Bank of Russia offers an online personal inflation calculator. Everyone can find out how much prices for particular products have risen.
ALEXEY ZABOTKIN:
As regards the fact that this problem is less acute in countries where inflation is lower, obviously, prices for various goods and services are rising differently during a certain period of time. Just as many other people, we also pay closer attention to prices that have risen most notably and estimate inflation based on prices that we have been focusing on the most over the past 12 or six months. The higher the inflation rate, the stronger the variance of relative price changes. Accordingly, the deviation of product prices that are growing most considerably from the overall level of inflation is greater in countries with higher inflation. You have just mentioned Turkey where observed inflation deviates from the statistics severalfold. Therefore, this difference will be decreasing as inflation slows down. We could observe how this difference was decreasing: during the period when inflation was at our target low level, specifically, close to 4%, inflation observed by households was approximately 8% or even lower during certain months, that is, the difference was four percentage points. Today, this difference is much larger exactly because overall price growth rates are high.
QUESTION from Bloomberg:
The cost of reserves in Chinese yuan has been declining. Does the Central Bank have any concerns about preserving the reserves in yuan? Does the Bank of Russia have any plans to diversify the reserves to friendly, although non-reserve currencies with a higher carry?
ELVIRA NABIULLINA:
Reserves invested in non-reserve currencies are no longer reserves. These are non-reserve currencies, even if these are non-reserve currencies of friendly states.
We do not have any diversification plan.
Speaking of the depreciation of the yuan against the US dollar, even when our gold and foreign currency reserves were more diversified, exchange rates of particular currencies were constantly fluctuating. This is a permanent process. It is critical for us to have yuan in our reserves as this helps us maintain financial stability when necessary, if we need any foreign exchange interventions in the FX market.
Our economy and settlements in foreign trade have already largely switched to yuan. Previously, when a considerable portion of the economy was denominated in US dollars and euros, yuan were not demanded. Currently, the situation has changed. Using yuan, we are able to address all the tasks that should be addressed using the gold and foreign currency reserves. Hence, we do not have any diversification plans.
QUESTION from TV channel NTV:
On 14 August, the US dollar exceeded the threshold of 100 rubles. Already on 15 August, the Central Bank sharply raised the key rate. Does this mean that the Bank of Russia considers this very threshold of 100 rubles dangerous?
And question two, please. Some people believe that, if not for the Central Bank with its high key rate, the economy would have been developing quickly, successfully and generally so as to make other countries envious. What do you think about such criticism and what could you say to such experts?
ELVIRA NABIULLINA:
As to our decision on 15 August, this was not a response to a certain threshold of the exchange rate. I have already said that we do not have any threshold. Indeed, the exchange rate has altered notably and quite rapidly, which we did not take into account in our forecasts. We were aware of inflationary risks. We had been talking about them and their potential materialisation almost from the beginning of summer and we could see that they had been materialising. Therefore, we decided it important not to wait for a scheduled meeting because this could have pushed inflation expectations even higher. As a result, this could have forced us to raise the key rate much more at a time than we did through this timely decision. However, this decision is aimed at returning inflation to the target of 4%.
As to the criticism, we have been always criticised. What could we say in response? We can only explain the rationale behind our decisions, and I am always doing my best to explain why we are making particular decisions. We are confident that a decrease in inflation will benefit both people and the country’s economy. As I have already said, an artificial reduction in the key rate would not lead to economic growth, but would rather accelerate inflation due to the circumstances that we have been talking about, including labour market tightness and so on. We would just have low growth rates and high inflation. This is the worst thing that could happen in the economy. Therefore, we are addressing the task of decreasing the inflation rate.
QUESTION from the public TV and radio company Kaliningrad:
Residents of the Kaliningrad Region are concerned about rising prices. Usually, inflation in the region is faster than across Russia in general and, recently, the problem of higher fuel prices has become especially acute. We are aware that the Kaliningrad Region is a special territory because of its geographical location. However, the situation in the fuel market has been generally affecting the entire economy, of course, and will probably affect inflation as well in the future.
What are the ways out? Is it possible to make any favourable forecast relying on the available data on these indicators?
ELVIRA NABIULLINA:
Fuel prices are an important factor of inflation. Of course, people pay a lot of attention to the growth rate of prices for petrol, for fuels in the overall price index. Indeed, this problem is urgent in Kaliningrad as long as this region does not manufacture petroleum products and incurs additional transportation costs, due to which petrol prices there are usually several rubles higher than in other regions. This is what is related to price levels. If we look at the dynamics of fuel prices in the Kaliningrad Region, the trend is generally the same as across Russia. Thus, petrol prices in the Kaliningrad Region rose by about 8.1% over the past year, whereas the Russian average is 7.7%. The growth rates are close, but the price levels differ.
Fuel price dynamics are certainly a matter of concern for people not only in the Kaliningrad Region but also in other Russian territories. Fuel prices are now adjusting to higher export prices and the new damper mechanism. The Government is already working to address the problem related to the damper mechanism. We expect that it will make efficient decisions in this regard.
ALEXEY ZABOTKIN:
I’ve got a couple of comments.
If we analyse the contribution of current changes in prices for petroleum products (petrol, diesel) to the inflation dynamics, petroleum products accounted for approximately 0.2 percentage points in the deviation of inflation, which was 1.2 percentage points as of the end of August, from the 4% target, and generally this is not much. However, considering that these are visible prices for everyone, this upward trend observed over recent months has been certainly pushing up inflation expectations. Therefore, the impact of petrol and diesel price movements on inflation expectations is a factor that we will definitely take into account.
QUESTION from Izvestia:
Herman Gref said in Vladivostok that he tended to believe that the key rate would soon be decreasing. However, there is no such feeling from your today’s decision and statement. Mr Zabotkin added that a reduction is only possible when inflation starts to slow down steadily. In other words, this will not be this year. Is such a decrease possible next year, at least in the first half?
And question two, please. A lot has been said about savings, but we also have investments. The situation in the stock market is similar to what we can see in the economy: households’ demand has risen, which is proven by the fact that individuals have replaced 80% of the foreign investors who exited the Russian market. Indeed, the number of offers is quite small. You’ve already presented a proposal supported by the Russian President and the strategic investment commission to oblige companies purchasing foreign businesses at a discount to offer 20% of the stocks in the open market.
Are there any similar proposals, ideas or discussions about how to encourage domestic companies to enter the capital market rather than to borrower capital from banks?
ELVIRA NABIULLINA:
You’ve said that the key rate was expected to be cut within a short period. What were the implications? This slowed down the transmission of our decisions. Actually, the faster our decisions translate into deposit and credit rates, the shorter might be the period when we need tight monetary conditions. Nevertheless, we hold that we will keep the key rate at a sufficiently high level until our decisions produce the desired effect and bring inflation down.
Mr Zabotkin, do you have anything to add?
ALEXEY ZABOTKIN:
I would refer to the forecast once again. The average key rate for the next year is forecast within the range from 11.5% to 12.5% per annum. Both these bounds are below 13%, which arithmetically means that the key rate will be reduced next year, provided that the situation evolves as assumed in the baseline forecast. What will be the exact path of this reduction and when it might begin will depend on future dynamics of price growth and inflation expectations.
ELVIRA NABIULLINA:
As to your second question, you are absolutely right saying that we need to develop the capital market. Indeed, the main source of financing now is bank lending, and it is essential to unleash the potential of the capital market. There are investors in the capital market and the demand for investments — you are totally right here. However, we still need to persuade issuers to enter this market. By the way, issuers are more inclined to offer bonds, whereas the situation with offering shares and equity raising is much more complicated. We can see that we need additional measures in this area.
Jointly with the Government, we have discussed a whole action plan aimed at inspiring both investors and issuers to enter these markets. Apparently, this is not a simple task. I would like to remind you that, some time ago, we were developing the bond market and it was very small then. We can now see that the scope of measures taken, a sufficiently large number of various measures addressing one task have boosted the evolution of the bond market. The same is with retail investors. We have even talked about the boom of retail investors. We have been able to provide the required instruments, create the necessary infrastructure, and so on.
I believe that this task can be tackled, but we certainly need not only one measure, but a whole range of measures. There is a lot to do to achieve the result in this area. As I have already said several times, to be able to raise investments in the capital market and even the bond market, we need a different level of disclosures. When raising a loan, information may be disclosed only to the creditor. In this case, information should be disclosed to the general public. We can see that many issuers are not ready to do this now. However, without these disclosures, the development of this market is actually impossible. Besides, equity raising might be more cost-effective than borrowings for large corporates. When we are told that they are facing our regulation on the risk concentration ratios per bank and so on, we may answer that companies might enter the stock market. This simply requires certain actions to ensure transparency and predictability of dividend policies, if we are speaking about shares. There is a great potential in this market and, jointly with the Government, we are planning to unleash it in the next few years.
QUESTION from the project Anna_finance:
My question is about borrowers’ costs associated with the already issued mortgages, specifically about the difference in life insurance policy prices in mortgage lending. This difference might reach 100%, that is, the cost of the same mortgage might be two times higher or two times lower depending on an insurer. Moreover, policies offered by banks’ subsidiaries are usually much more expensive.
On the one hand, this is very convenient to purchase an insurance policy and extend the mortgage for the next year at once in a bank’s mobile application.
On the other hand, the price for such convenience is sometimes too high, especially when a borrower is already an elderly person and, accordingly, the life insurance policy is generally more expensive for a number of reasons. Not all people can comprehend this when paying more for policies. Is it possible to somehow encourage banks to increase the transparency of information about policy prices for people? For instance, is it possible to oblige banks to notify borrowers about particular benefits from banks’ policies and about accredited insurers?
ELVIRA NABIULLINA:
Thank you for the question. Indeed, there is such a problem in the market.
Some banks issuing mortgages, among other loans, are capitalising on people’s unawareness and offer more expensive insurance products than those people might purchase from another insurer in the market.
Therefore, the main thing that might help address this issue is probably to raise people’s awareness that they are entitled to purchase other insurance policies and that banks may not decline a mortgage application only because a person has another insurer’s policy. To this end, the Government made relevant decisions. As far as I remember, they became effective from 1 September, and banks are now obliged to notify borrowers of their right to choose an insurer. This information should be available either on banks’ websites if policies are purchased online (I am not sure about mobile applications), or at client service points where these products are bought. This will be monitored by the Federal Antimonopoly Service because banks’ failure to do so will be a violation of the antimonopoly legislation. We hope that these measures will turn out to be effective, but we will be monitoring the situation. This is actually misselling when banks sell a product without providing sufficient information about existing alternatives.
QUESTION from Ridus:
There is a considerable percentage of people perceiving the digital ruble as a certain way of financial control. They tend to think that the introduction of the digital ruble is similar to the provision of biometrics. There are already long queues at multi-purpose centres rendering state and municipal services. In view of this, could you please give a clear comment whether there is any connection with the provision of biometrics and how possible it is that cash and non-cash settlements might be prohibited due to the adoption of the digital ruble?
ELVIRA NABIULLINA:
Firstly, biometrics and the digital ruble are two absolutely different projects that are not connected in any way. The use of the digital ruble does not require biometric data. Both these processes — the provision of biometrics and the use of the digital ruble — are totally voluntary. We firmly believe that a person should be free to choose whether to make payments using digital rubles, cash, bank cards, online transfers based on QR codes, and so on. We provide the opportunity to choose among these options. We continue to develop cash circulation. As you know, we are even updating the designs of a number of banknotes, so you can be sure that cash will remain in circulation. Cash was and is still demanded, but according to the dynamics and overall statistics, people prefer more convenient forms of payments using mobile applications and cards — these are the preferences of people. Of course, the voluntary use of the digital ruble is the key issue. People will be able to choose. We believe that payments in digital rubles will be easier, more convenient and cheaper for people, but if they prefer cash or card payments, they are free to choose them.
QUESTION from TV channel Moscow 24:
My question is about mortgages. Moscow residents are only concerned about mortgage lending. The question is as follows. The Central Bank is seeking to cool down this market, and the reasons are absolutely clear. But could you please explain what do you mean talking about cooling-down? Do you imply a decrease in the demand for mortgages, or in the amount of issued mortgages, or in real estate prices at last? What do you mean talking about cooling down the market? Is it a quantitative or a qualitative characteristic?
ELVIRA NABIULLINA:
Cooling-down is rather a qualitative characteristic meaning the return to a balanced growth path that does not involve risk accumulation. Excuse me for such a theoretical definition, but this market has been growing quite fast for several years already by the moment. As you’ve said, this has entailed a rise in new housing prices, among other things. We can see that subsidised lending has also affected this situation. If we analyse the period from early 2020 when these large-scale subsidised mortgage lending programmes had been launched until the beginning of 2023, new housing prices doubled, wages increased by nearly 35% over that period, and consumer prices rose by about a forth, namely 27%. What does this actually mean? This means that housing might become less affordable although mortgages seem to be affordable. Therefore, the demand for mortgages should grow at a pace that would not cause such a rise in housing prices that we are currently observing. This is evidence that the growth is unbalanced. We are taking measures that I’ve mentioned, specifically the macroprudential buffers.
We have an extensive subsidised programme, and the Government made the decision that it would remain effective until the middle of the next year. We believe that, after this period, there should only be targeted programmes that support only the target groups of people.
Thank you for attention.