Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 27 October 2023
Good afternoon,
Today, we have made the decision to raise the key rate to 15% per annum.
Monetary policy tightening is already being translated into the economy. This is evident from higher interest rates on savings and a slight slowdown in lending. However, the steady expansion of demand has been increasingly surpassing the potential to ramp up the supply of products and services. Consequently, prices are rising faster than expected. Fiscal policy easing is another proinflationary factor over the forecast horizon. Therefore, it is essential to tighten monetary policy even more. Our policy will support a more balanced growth rate of credit that would be in line with the objective of returning inflation to the target of close to 4% next year.
I would now dwell on the reasons behind our today’s decision.
Firstly, as regards inflation.
Price growth rates are high. The inflation acceleration in September significantly exceeded our estimates. Strong pressure on prices persists in October as well. Even leaving aside one-off factors, the current increase in prices is at least two times faster than target inflation. All indicators of persistent pressure on prices exceed the target.
A matter of concern is companies’ price expectations. They are now close to multi-year highs. Households slightly lowered their inflation expectations in October, but they are still high. Analysts’ inflation forecast for the next year exceeds the target, which is obvious from the findings of our macro survey. High inflation expectations in the economy are also a sign of insufficiently tight monetary conditions that have formed by this point in time.
Although our decisions are already being translated into the economy, current inflation is still largely impacted by earlier lower interest rates offered in the first half of 2023. I would like to remind you that we had been maintaining the key rate at 7.5% per annum for ten months until July. Alongside expansionary fiscal policy, this helped return the economy to the pre-crisis level within quite a short period. However, the further significant acceleration of inflation signalled that monetary conditions in the economy were actually accommodative. Therefore, in the middle of the year, we began to raise the key rate. However, because of the long time lags, the effects of accommodative monetary policy are still passing through to prices even now. Similarly, the effects of monetary tightening will fully translate into the economy several quarters later.
We have updated our inflation forecast for both 2023 and 2024. The revised forecast takes into account the actual rise in prices, as well as the effect of higher government expenditures in the new budget. This year, prices will go up by
Secondly, the economy.
According to our estimates and recent data on economic activity, GDP growth in the third quarter was higher than expected. The main driver was investment demand that was largely supported by budget expenditures. Besides, the fiscal stimulus is focused on manufacturing sectors demonstrating maximum growth rates.
Due to high domestic demand, companies were able to pass through their rising costs to consumer prices. Accordingly, businesses’ profits are close to the record highs of 2021.
The increase in companies’ equity along with budget expenditures and lending growth enabled businesses to ramp up their investment plans. According to the monitoring of businesses, over recent months, companies have become even more optimistic in their estimates of future investment in the expansion of their production facilities, although interest rates on loans have risen. However, the staff deficit is considerably dragging down the expansion of production. Two-thirds of respondents are now facing this problem that is especially acute in the manufacturing sector. To retain or hire personnel, businesses are raising wages, which is inevitably followed by price increases needed to cover costs for higher wages. As long as increasing demand cannot be covered by ramping up output immediately, its growth does not result in higher consumption, but only pushes prices higher up. To prevent inflation from spiralling out of control, we need to maintain higher interest rates in the economy.
Considering the actual GDP dynamics over the second quarter and the recent data for the third quarter, we have raised the forecast growth rate of the economy for this year to
I would now speak on how monetary conditions have been changing following our earlier decisions.
Deposit rates have been adjusting most quickly. The growth of interest rates makes it possible to offset losses caused by high inflation. As a result, households’ demand for deposits has increased. People are not only transferring their funds from current accounts to time deposits, but also returning the previously withdrawn cash to banks.
The pace of adjustment in the credit market varies across segments. According to recent data, unsecured consumer lending is now demonstrating signs of growth slowdown. Mortgages continue to increase fast, but this segment is affected by subsidised programmes that are not sensitive to key rate changes. The portion of the mortgage portfolio formed at market rates is already responding to the monetary policy tightening.
As regards corporate lending, the annual growth of the portfolio reached 21.5% as of the beginning of October. Corporate lending is expanding despite higher interest rates. This is because companies have high price expectations and, therefore, do not consider current lending conditions as tight. In other words, many businesses could raise loans expecting that a further acceleration of inflation will depreciate their debt. Another driver behind corporate lending is the fact that some companies are ready to raise short-term loans at higher interest rates, expecting payments under state contracts at the end of the year. More details about monetary conditions are available in our October Regional Economy report.
Our today’s decision on the key rate will increase money market rates. Accordingly, interest rates on short-term loans will be higher than those on long-term loans, which will intensify the disinflationary effect from our policy.
I would briefly talk of the budget. Fiscal policy will be much more expansionary than we assumed in our September forecast. A stronger fiscal stimulus reduces room for an increase in private lending. Considering this fact, we have lowered the forecast growth rate of lending to the economy for the next year by two percentage points to
Now, I would like to speak of external conditions.
The growth of the world economy continues to slow down gradually. Moreover, the situation in the Middle East is an important factor of uncertainty, including as regards possible changes in energy commodity prices. Our updated forecast assumes slightly higher oil prices. By the way, I would like to note that we have started publishing forecast prices for Brent instead of Urals. We will thus be able to better present our view of the balance in the global oil market and compare our forecast with the price used for taxation purposes.
The reversal of the dynamics of the balance of trade and the key rate increase from
In our updated forecast of the balance of payments, we have raised the estimate of exports due to a higher forecast price for oil. The forecast of imports has been lowered as import quantities are expected to stabilise and respond to the key rate increase. Overall, the surplus of foreign trade is expected to be slightly larger than assumed in the September forecast.
I will now speak of possible risks.
As before, the ratio of risks is significantly shifted towards proinflationary ones. The most important of them are still elevated inflation expectations of businesses and households, faster lending growth, more acute staff shortages, and more expansionary fiscal policy. A possible slowdown of the world economy that might affect the exchange rate remains on the list of risks. Disinflationary risks are weaker. They include an additional rise in prices for Russian exports and a faster cooling-down in the credit market.
Winding up, I would like to comment on monetary policy prospects.
The Bank of Russia possesses a set of efficient tools to reduce inflation to the target. We were raising the key rate sufficiently fast at our recent meetings and will be ready to do this again if there are no signs of a steady deceleration of inflation and a decrease in inflation expectations. Inflation has been persistently deviating from the 4% target beginning from 2021. Such a long-lasting deviation might unanchor inflation expectations and confuse economic agents. Our experience shows that the period of higher interest rates in such conditions should be longer.
This is what makes the difference between the current situation and the two other cases of significant key rate increases in 2014 and 2022. Then, in addition to faster inflation, we also observed material risks to financial stability largely induced by external factors. We had to address these risks by changing the key rate. After mitigating these risks, we were changing the key rate focusing on the objective to slow down inflation. I would like to emphasise that disinflationary processes in
The current situation is totally different now. We are facing inflation caused by the internal imbalance between demand and supply. Demand is expanding, whereas the increase in supply is hindered by restrictions. Consequently, price growth is accelerating. Moreover, fiscal policy will remain expansionary during the next three years. This means that monetary policy should be tighter to ensure the return of inflation to 4%.
In our updated forecast, we have raised the path of the key rate. The average key rate will equal
Thank you for attention.
Q&A for the Media
QUESTION from Interfax:
Going by your words about a higher key rate path for the next three years, is it right to say that we are in for potential rate reductions? When is a rate reduction possible, and in what conditions?
My second question is on the subject of fiscal policy: what is the contribution of the soft fiscal stance to today’s upward move in the rate? Would it be fair to say that if the 2024 budget had been flat compared with
ELVIRA NABIULLINA:
We can potentially switch to a rate decrease once we have seen a steady decline in inflation in what is its more persistent components.
Based on our baseline forecast, this can be expected next year; however, any deviations we could see from the baseline scenario and pro-inflationary risks will be taken into account in the monetary policy path, and the policy would be tighter then. We cannot say at this point in time when exactly a switch to softening is due. This will depend on the data we receive on inflation and inflation expectations, among others.
Speaking of budget parameters and their implications for the rate decision, I admit they are significant. We have priced this factor in without calculating the necessary size of increase in this scenario, since we consider the totality of factors. Admittedly, the budget is indeed a consideration that underlines our today’s decision.
QUESTION from Argumenty i Fakty:
Can you explain how the Bank of Russia plans to bring inflation to 4% in the markets for food, fuel and administered prices — those that are less sensitive to rate rises?
And question two, please. What is your view of the practice when people make deposits at new — higher — rates and then take out a subsidised mortgage, expecting to earn on the difference between the rates and subsequent growth in house prices? Did the central bank expect this effect from the rate increase?
ELVIRA NABIULLINA:
While on the first question, our key rate affects all goods and services. However, there are indeed some of them — including those you mention — whose consumption does not depend on prices. In this case, manufacturers and suppliers have more opportunities to raise prices. High inflation and rapidly growing demand may indeed both lead to prices for such goods outpacing headline inflation.
It is true that our key rate cannot have direct influence over a specific product like cucumbers or fuel, but our policy aims to hold back the overall price level. This means that 4% inflation translates into an average 4% rise in the cost of the CPI basket. If prices for essential goods and services in that basket rise faster than others, the demand for other goods decreases, resulting in a slower pace of growth in prices for other goods.
The key rate also affects the indexation of prices, given that indexation is usually consistent with cumulative inflation. With the key rate influencing inflation, the lower headline inflation, the lower indexation of prices may be needed.
It is probably up to the Government to take action to curb price growth across individual goods. The Government is indeed taking transitional measures towards supply and demand control in specific markets. These measures include restrictions on petrol and diesel fuel exports introduced in September. However, our position is that this type of administrative action can only have a short-term impact. Long term, they make the production of such goods a loss-making business, leading to the opposite effect of an emerging shortage.
Now on to mortgages. Given there is a whole range of subsidised mortgages, it is quite natural that consumers take out preferential fixed-rate loans and store their savings in high-interest bank deposits. Although not widespread, this practice is of concern to us, as long as it enables people with savings to cash in on subsidised loans. That is, the actual source of this income is taxpayer money, which flows towards those who have savings and can keep them in higher-rate deposits. Meanwhile, this situation is detrimental to those really in need of a house, considering that the extensive subsidised mortgages are pushing real estate prices higher, propelling such households to borrow more. As you know, house prices have seen considerable growth of 90% over the past three years, much above growth in inflation and incomes. This can potentially undermine the positive effects of subsidised mortgages.
We therefore believe that extensive preferential programmes are only good for a crisis response, and as they are rolled back, things will improve and this injustice will be repaired.
QUESTION from Slozhny Protsent Project:
The Bank of Russia has supported the decree mandating exporters to sell foreign currency revenues, although it saw no need for it before. Why did the Central Bank change its position, and what should happen for it to support the potential extension of this decree in April 2024?
And question two, please. Floating-rate loans to businesses total ₽29 trillion — almost half the total loan portfolio of banks. My dual question in this regard: how do you feel about banks upping the ante with their borrowers’ interest risk? Can the rate rise currently result in the emergence of a non‑payment problem similar to the problem of foreign currency loans in
ELVIRA NABIULLINA:
We reaffirm our view on what currency controls can deliver. We believe that such restrictions — even if they make the difference — can only be a short‑term remedy. Exchange rate movements are driven by underlying factors such as exports, imports, and the appeal of the local currency as a store of value. This is no more than an interim measure, and it applies to major exporters. The Bank of Russia and the Government both intend to watch how it plays out to assess the effects. The short-term effects may come on the back of lower short-term volatility in the foreign exchange market, helped by rising turnover. Even should our exporting companies return and sell more of their export revenues — although they invariably sell a fairly high proportion of foreign exchange revenues — they can also buy them out. This sends turnover higher and may have an indirect impact on short-term volatility.
While on the subject of floating rates, as a reminder, rates on retail loans are practically never floating. There are floating rates on corporate loans — which is indeed consistent with global practices since it is considered that legal entities can assess their interest risks. There will always be interest risks: either they remain with a bank issuing a fixed-rate loan to a firm, and the bank passes its interest risk on to the higher rate on the fixed-rate loan (and the loan then becomes more costly exactly on account of the interest risk of the bank); or this risk is assumed by borrowers, and the initial rate may be lower in that case, but the interest risk resides with borrowers. Therefore, we cannot say that the situation is similar to the past problem of foreign currency mortgages. At the time, those taking out foreign currency mortgages failed to assess the risks of floating rates. Overall, we are in favour of tightly regulated floating rates for individual borrowers.
Now, speaking of legal entities, based on current banking statistics, there is zero growth in floating-rate loans being restructured, so that is fine for now. In our opinion, corporate profits are sufficient to service these loans in the context of a growing economy.
ALEXEY ZABOTKIN:
There is a fundamental difference between the case of foreign currency mortgages and the case of floating rates. We should all understand — and this is consistent with our forecast and the logic of monetary policy — that the period of high interest rates is temporary. This time round, it will last longer than in 2015 or 2022, but as inflation returns to 4%, the key rate is expected to return to its neutral range in line with the forecast. This is why the increased level of interest payments of floating-rate loans is expected to be in place for a relatively short period of time.
When the exchange rate hit a fundamentally new mark to never return to the range at the time when consumers borrowed in foreign currency, their debt burden and the amount of their payments in rubles were up for good. This is in fact the difference between the cases of floating rates and foreign currency mortgages.
QUESTION from TASS:
Can you please tell us, has the 2-percentage-point hike been the toughest option, and how broad was the consensus? The average annual rate has grown to 15.2%. Does that suggest we are in for another rise before the end of the year?
ELVIRA NABIULLINA:
Three options have been on the table. We have not discussed the option of holding the rate. The options are an increase of 1 percentage points, or 1.5 percentage points, or 2 percentage points. The consensus — and the vast majority even in the course of discussion — supported a 2-percentage-point increase in recognition of the analysis I have mentioned as regards pro‑inflationary risks, both realised and expected.
As for this year, we provide a key rate forecast through the end of the year. It assumes both a decision of holding the rate unchanged to be made at this year’s last meeting, and an upward move.
QUESTION from Kommersant:
The forecast has been revised once again. You mention the two external variables that have changed: the change in the amount of fiscal stimulus and the change in oil prices in line with projections. Are there any other factors of comparable weight that forced you into the forecast review?
ELVIRA NABIULLINA:
These [two] are indeed meaningful factors, notably changes in the amount of fiscal stimulus. However, there are other factors. This year, actual Q3 inflation beat expectations. This means that the supply-demand gap is higher than we estimated. This is the factor we also considered.
ALEXEY ZABOTKIN:
Once we look at flash estimates for Q3, inflation and lending growth, we can see that all these Q3 readings went above our July’s estimates, and even exceeded the assumptions in September’s update of the forecast. Ultimately, the upward trend across Q3 data proved stronger on the back of demand. We will need a tougher monetary stance to set the economy back on a path of sustainably balanced growth and bring inflation back to the 4% target within the same timeframe. Put it another way, we observe a shift in the initial forecast assumptions, which has weighed in on the entire path.
QUESTION from Vostok-Teleinform (agency):
Are you concerned over the risk of a credit squeeze resulting from today’s events, or do you think that banks will be able to adjust to the new environment after all? Is a banking crisis possible in this country?
ELVIRA NABIULLINA:
We do not have such concerns. We have no expectations for a credit squeeze. For all the deceleration, lending is growing at a rapid pace. For example, corporate loans are adding some 20% in annual terms, or even slightly more. Unsecured consumer loans are expanding at a 15% rate, not to mention mortgages, growing at around 30%.
Our policy aims to ensure that lending growth is fairly balanced. Our projection for credit growth next year is positive. We expect credit to grow
In fact, a collapse in the credit market can be triggered by, rather than rising rates, high inflation — which precludes banks from extending long-term loans. This is why our policy is intended to tame high inflation, which will help make long-term credit more affordable.
QUESTION from RIA Novosti:
The first question is about inflation. In your view, in which period is inflation expected to peak in Russia: at the end of this year or between early and mid-2024?
And another question, please. The phrase ‘structural transformation of the Russian economy’ has been edited out of the central bank press release and replaced with ‘economic developments over the forecast horizon’. Does this mean, in your opinion, that the transformation is complete?
ELVIRA NABIULLINA:
With the peak of price growth behind us in the third quarter, inflation is set to slow down. However, inflation in annual terms is due to peak next spring, largely driven by base effects, given that it is calculated for the past 12 months.
As for the press release, we resumed the use of our traditional wording ‘economic developments’. The economic transformation phrase was included when we talked about an economic restructuring entailing drastic changes in relative prices. Therefore, we intend to be tolerant of inflation potentially exceeding the 4% target in the course of this structural transformation.
The economic transformation is ongoing; it is expected to progress. However, since we are already past the drastic price adjustment, which was necessary and which we saw last year, current inflation is largely determined by demand-side factors, that is growing demand. This is why we opted for our standard language.
QUESTION from Russia 24 TV channel:
This week, the media reported on the Central Bank’s plans to set up a closed data room providing advanced statistics, to be accessible by only individual institutions for research. Would you please clarify this initiative and give us some details?
ELVIRA NABIULLINA:
We have yet to make this decision since it is at an early discussion stage. This is in fact a common global practice, and it aims to support analytical efforts nationwide by providing data access to analysts, that is, those working on expert reports and opinions, including institutions and universities.
The arrangement is to provide data in anonymised form, that is, transfer is impossible if data is bank secrecy or otherwise confidential. But the arrangement has yet to be finalised, and the discussions are ongoing.
ALEXEY ZABOTKIN:
It is not about providing some arrays of data we keep undisclosed to the public. The idea is to rely on this mechanism, if the decision is made, to provide more granular data for in-depth research. This does not suggest there will be a data array in aggregate form that we keep undisclosed.
QUESTION from Bloomberg:
Do the recently adopted currency controls have potential implications for future monetary policy, for example, if a stronger ruble were to help cut the tight monetary policy cycle?
And another question, please. Your colleagues, bankers from VTB, said that this rate-setting meeting is no less fateful than the Battle of Waterloo. Do you feel like this is a Battle of Waterloo for you? Did you have to make a difficult choice? Were there anyone putting pressure on you? Who did you fight, in fact, in this battle?
ELVIRA NABIULLINA:
Let me take the second question first: our battle is against inflation. No matter what metaphors to use, we are indeed determined to fight high inflation.
Now on to how monetary policy accounts for the specific factor of currency restrictions. We take into account exchange rate movements and expectations as to the future exchange rate. We reiterate our posture: the underlying factors are changes in exports, imports, demand for imports in ruble terms, and the appeal of the ruble as a store of value. We rely on this [the demand and appeal of the ruble] to make a direct impact on the key rate.
This is why the exchange rate is indeed one of the factors, and we take the view that it is a potential pro-inflationary factor. If a change in the underlying factors leads to a weakening of the exchange rate, we will regard this change as a pro-inflationary factor. Neither can we rule out a change in the external environment, which may propel the ruble to strengthen. We will consider this as a disinflationary factor.
Based on our estimates, the specific impact of currency restrictions on exchange rate trends is set to be insignificant. If we observe this impact, it will only be short-lived, but we do not yet have the data to confirm or defy this projection. We will be watching this. True, it is next to impossible, in our opinion, to isolate the impact of this measure on the exchange rate. It is difficult to do so for the reason that the measure was taken at a time of an improving trade balance and a rising key rate — the time when these two factors had major implications for the exchange rate. Nevertheless, we will analyse the data to see what conclusions can be made, including data on sales of foreign currency revenues, and to say whether there are changes. We will be monitoring this situation.
QUESTION from RBC:
Back to the decree about the mandatory repatriation and sale of foreign currency revenues, it is clear that we do not have complete information on this initiative. Perhaps the Bank of Russia has an estimate for the potential currency inflow to the domestic market coming as a result of this decree being enforced?
My second question is about the
ELVIRA NABIULLINA:
As I have said in response to the previous question, it is no easy task to disaggregate the effect of foreign currency earnings sold by exporters. Flash readings suggest they are growing, but export products have also gained in price to date. More so, export revenues come in with lags, that is to say, the improvements in the trade balance of previous months are also at play.
I therefore think it is almost impossible to make an accurate estimate of the currency inflow on the back of this measure.
As for the banknote, we will be working on a new design of the reverse. The obverse will probably remain as it is. The design [of the reverse] will be discussed. We intend to update the procedure for discussing note designs. For every new note, we set up an expert team made up of historians and cultural figures. Having said this, I think that we will step up engagement with our expert teams, and perhaps initiate a wide public discussion of the possible design.
The intention is to come up with the updated design next year.
QUESTION from Reuters:
In the press release, there is no phrase about considering the necessity of further increases in the key rate at the upcoming meetings. Can this be considered as forward guidance suggesting a looser monetary policy stance is ahead?
Question two is about the mandatory sale of foreign exchange revenues. Does this mandatory sale apply to all major exporters, or are there any exceptions among them?
ELVIRA NABIULLINA:
As for the phrase, we sought to give a neutral signal about the central bank rate. A lot will depend on incoming data and on whether inflation shows a sustainable decline trend.
As I have mentioned, the key rate may be revised upwards or maintained before the year end. That is, the moderately tight signal has turned neutral.
While on the mandatory sale of revenues, according to my data, it extends to all major exporters without exceptions.
QUESTION from Rossiyskaya Gazeta:
The subject of wage growth has been brought up, and it was noted that rising income is fuelling inflation, one way or another. What can you say about the significance of this factor? If it is indeed very significant, then what is there to offset it?
ELVIRA NABIULLINA:
We have been talking about a tight labour market since last autumn. This is a major pro-inflationary factor, and we take it into account in decision making. We report skills shortages of all types: skilled labour, blue-collar workers and managerial personnel.
This problem is highly relevant to the manufacturing sector, metallurgy, mechanical engineering and chemicals. With demand for labour exceeding supply (which is just the case), employers increase wages to retain or hire new staff to expand production. Undoubtedly, this sends aggregate demand higher, which outpaces the economy’s capacity to produce goods and services. This is the case.
This is evidenced by rising inflation. The growth of demand we are discussing translates only into the growth of prices rather than consumption in physical volumes. To prevent the shortage of labour from snowballing into a persistent problem of spiralling inflation, a tight monetary policy is needed. Importantly, sustainable, system-wide wage growth should never outpace labour productivity growth.
QUESTION from Furydrops (weblog):
Everyone knows about the trilemma of international finance, but recent studies suggest that developing countries are confronted with a dilemma, rather than the trilemma, regardless of the exchange rate regime. Without capital controls, a monetary policy cannot be termed truly independent. One way or another, it has to adjust to monetary policy cycles across the globe. As a rule, this is all about net importers and economies that are heavily reliant on the payment of foreign currency debt and can therefore experience very serious problems arising from excessive outward flows of capital.
Would it be fair to say that after the 2022 events, we find ourselves in similar conditions — when capital flows are unsteady — and we need to stiffen, rather than just maintain, the restrictions on the movement of capital? Or the Russian economy has chalked up a certain level of stability, as it were, and we can do without such measures so, theoretically, are we back to the trilemma?
ALEXEY ZABOTKIN:
In our view, the opportunity to pursue an independent monetary policy goes hand in hand with long-term confidence in the stability of the national currency. Importantly, stability here is understood as more than the stability of the exchange rate, since exchange rate fluctuations are possible within a wide range when external conditions change, enabling the economy to adapt to such inevitable changes in external conditions, which vary in frequency and expectedness. We speak of maintaining the purchasing power of the national currency — essentially, sustainably low inflation.
An economy demonstrating to its households, businesses and global investors that its currency is indeed a reliable store of value and can be used for long-term savings is indeed in the trilemma. To understand this, look no further than so-called small open economies, for example Switzerland. This is a small economy in relation to the global financial system, but its monetary policy is quite independent. Why so? Throughout the 20th century, Switzerland boasted the lowest inflation.
QUESTION from NTV:
Effective 1 October, export duties pegged to the dollar have been introduced. How much can this measure, from the Bank of Russia’s viewpoint, help slow inflation?
And another question, please. With the Central Bank implementing a fourth consecutive rate rise, and the process is continuing apace, the fear is that this process is here to stay, that it will linger. Has the Central Bank put a cap on the key rate past which the rate exposes the economy to risk?
ELVIRA NABIULLINA:
We will hit the cap once inflation has steadily declined to our 4% target. At the same time, we predict that the rate increase needed to tame inflation will put it on a downward path but ensure that economic growth is in positive territory.
It is clear from our forecast that we have revised up our projections for economic growth this and next year, so our estimates suggest the economy is set to continue to grow into
ALEXEY ZABOTKIN:
Current export duties (as with any export duties) shape export parity prices within the domestic economy, provided that global price and exchange rate trends are aligned. The export duty framework we have put in place will help reduce export parity prices given a set level of global prices and the exchange rate. Therefore, we expect a short-term disinflationary impact from it. This will not work to sustainably reduce inflationary pressure but will bring down the current price level.
A threat to the economy does not come from rising interest rates but from imbalances and financial vulnerabilities accumulated in the economy. They tend to arise particularly quickly at a time of soft monetary policy. Let us have a look at both the global financial crisis of 2007, 2008, and 2009, and current volatility in foreign financial markets. All this is largely due to cheap debt accumulated at a time of low interest rates, which proves unsustainable at a time when rates are high. This does not come as a result of high rates but of the debt accumulated in the periods leading up to the tightening of monetary policy.
QUESTION from RBC Kaliningrad:
Imagine that inflation in a region (the Kaliningrad Region in our case) is accelerating and stably staying past the national average. Can the regulator resort to certain measures to reduce it? If so, which is the threshold of inflation that triggers the application of such measures? Does the monetary policy toolkit have a regional dimension or does it only work nationwide?
ELVIRA NABIULLINA:
Do you think it is imaginable that the exchange rate in a certain region is significantly different from other regions? This is hardly possible, owing to the ruble area across Russia and beyond. Similarly, there can only be one interest rate in roubles. Our monetary policy extends to Russia as a whole, and we rely on our instrument — the key rate — to steer aggregate demand throughout the country, rather than at a regional or sectoral level.
What would happen, hypothetically, were the Central Bank to set different rates for its operations in different regions? Were the key rate high in some regions, people would rush to deposit money there at higher rates. Conversely, they would rush to borrow if the rate was low in other regions. This would lead to the emergence of imbalances, but the market would flatten out thanks to the freedom of money movement within the country.
Having said that, I admit that a certain region may post a more substantial rise in prices. This comes as a result of so-called supply shocks, which work to disrupt supply chains or drive up the cost of logistics related to product supplies to individual regions. This is a structural factor, and monetary policy measures cannot be of help. The action should target market development and combat supply bottlenecks in the markets for such goods. These measures are part of structural and fiscal policy.
QUESTION from Invest Future:
The first question is about the dedollarisation of the Russian economy. Has it added to the efficiency of monetary policy?
And another question, please. You have mentioned today the Middle East conflict and the associated trends in energy prices. Consistent with current projections by Western investment banks, the oil price is on track to hit $150 or even $250. To what extent will this affect the Russian economy and thereby monetary policy?
ELVIRA NABIULLINA:
Doubtless, dedollarisation in the Russian economy and financial system enables us to implement a more efficient monetary policy. This means that our key rate decisions take less time to translate into the economy.
Dedollarisation is making progress. Actually, we have been pursuing dedollarisation policy in the financial system up to the events of last year, given its importance as a monetary policy factor.
The Middle East case is marked with great uncertainty, and much will depend on how the situation unfolds.
Indeed, some experts believe that this is set to drive up prices, and a meaningful increase in prices would certainly affect the global economy. Global demand would decline then. That is to say that, on the one hand, the Russian economy would see higher export prices but, on the other hand, demand would decline on the back of a global economic slowdown. This is a factor of uncertainty, and we take it into account in making a decision. This is a risk factor, but it is difficult to say at this moment how the situation could develop.
QUESTION from Financial One:
Some experts have coined a new term, ‘new reality’, that is, we are facing a new reality. There is a debate over whether a new reality has set in or there is no new reality in terms of macroeconomic performance, that rates are now double-digit, and we have to learn to live with them without expecting their decline. Recent history has marked higher rates and tighter monetary conditions, that is, we have by now just found ourselves in a kind of new reality and need to adapt and act accordingly. Alternatively, are we on course to return to the lower, single-digit rates, and how soon then? In the former case, are we stuck in double-digit rate territory for some years to come, and under no conditions will we see a return to single-digit rates?
ELVIRA NABIULLINA:
It is true to say that current rates are high, and our forecast assumes that next year will be a year of double-digit rates. However, we proceed from the fact that our decisions, both recently made and under discussion, will enable a sustainable drop in inflation towards our target, ultimately ushering in a switch to a rate-cutting cycle as early as next year. For 2025, we forecast the key rate to average
Therefore, we need to pass this period of high interest rates to reduce inflation. Rates will decline thereafter, bringing no acceleration in inflation.
QUESTION from Argumenty i Fakty Far East:
A narrow view of the red line for the ruble-to-dollar exchange rate for this year is ₽100. Anything above this figure points to the need for an immediate stabilisation response. What is the Bank of Russia’s definition of this red line? Which is the mark to trigger the measures?
Which is the lowest mark for the dollar to touch after the rate increase to say that the ruble has strengthened?
ELVIRA NABIULLINA:
I can only reiterate that we do not have a red line concept. Our policy assumes a floating exchange rate, but the exchange rate is a factor we account for in making decisions. In our opinion, urgent stabilisation measures are needed (and they are part of our toolkit such as foreign exchange intervention) when financial stability risks emerge and the foreign exchange market is short of liquidity, rather than in response to a certain exchange rate, no matter the round figure. This would be the time for us to apply these measures.
The exchange rate is driven by underlying factors and should achieve market equilibrium, which will be recognised in our policy decisions.
QUESTION from Izvestia:
The Ministry of Economic Development has revised next year’s inflation outlook up to 5%. Does your range of
And the second question: are there any other new measures under discussion to support the ruble — on the instruction of the President? Or have they all been put in place? Should we finally expect the imposition of ruble transfer restrictions? This question follows on what Mr Kostin said, considering that your Financial Market Risks Review says that banks from friendly countries, among others, are pressuring the exchange rate of the ruble.
ELVIRA NABIULLINA:
As regards next year’s inflation outlook, we intend to bring inflation back to
ALEXEY ZABOTKIN:
For clarity: annual inflation of 4% and even 4.5% by the end of next year implies that the current rate of price growth in the fourth quarter next year will stand at 4% or even slightly lower in annualised terms. Accordingly, this will mark a return of inflation to our goal of close to 4%. That is, we still expect our policy to be sufficient to bring inflation back to the target of close to 4% next year. But this will involve sustaining the key rate at an elevated level for an extended period.
ELVIRA NABIULLINA:
As for possible additional measures to somehow control capital flows, the Central Bank does not take part in such discussions.
QUESTION from Bitkogan Project:
The phrase about the necessity of further increases has been removed from your press release. You have just confirmed that your signal is nothing but neutral. At the same time, the Bank of Russia’s forecast does not rule out a rate increase to 16% in December. What is the meaning of this discrepancy, and is the signal really neutral?
ALEXEY ZABOTKIN:
The signal is neutral. What does this mean? Based on the results of today’s discussion and the data on hand, the Board of Directors is less inclined to believe that its next meeting will opt for another rate rise — compared to its view back in September about the October meeting. At the time, we said that the Central Bank would assess the necessity of increases.
Nevertheless, based on our understanding of the balance of risks for inflation, we do not rule out that a further rate increase will still have to be implemented even before the end of this year. The probability of this decision is to a greater extent predicated on incoming data.
QUESTION from Moskovsky Komsomolets:
To financial industry experts, developments in the market for subsidised mortgages look critical. Are financial bubbles expected to emerge in this sector? If so, how quickly can the mortgage market trigger a crisis?
And the second question, please. The Government is paying attention to the Bank of Russia’s recommendations as to subsidised mortgages, and it is receptive to the assessment that the market is overheated. A tightening has started, and the minimum down payment is up. What further guidance is expected from the Bank of Russia concerning subsidised mortgages? Will you make the case for a rate hike, a rise in the down payment, tougher borrower requirements, or other options?
ELVIRA NABIULLINA:
In September alone, mortgages were up 4.2%. These rates are more than some early signs of an overheated market, so here we indeed see risks. I have raised this problem on many occasions, and what suggests that these risks are persistent with no downward trend in sight is, among other things, the lingering gap in housing prices between the primary and secondary markets.
This has necessitated our action, including the introduction of macroprudential add-ons effective from 1 October. They are quite impactful. We believe that they work to curb the volumes of lending, and of high-risk loans in the first place, since macroprudential measures are meant to reduce the share of high-risk loans. The key rate increase plays a role in the market for mortgages. The unsubsidised sector is slowing but its overall growth holds. Certainly, risks are still there due to widely applied preferential mortgage programmes.
We believe it is necessary to develop a proposal for the Government whereby down payment requirements are further tightened for subsidised mortgages. Admittedly, this would be up to the Government to decide.
QUESTION from Vedomosti:
What do you make of the idea of buying out shares of foreigners in Russian companies with a discount in the public interest, rather than to the benefit of a number of companies and people — which is the case? For example, buying and investing them into the National Wealth Fund. What is your assessment of the risks of losing confidence in your policy if next year is above the inflation target, for the fourth time running?
ELVIRA NABIULLINA:
We believe that every effort must be made next year to bring inflation to target, considering that an extended, years-long, period of inflation deviating from target can undermine confidence in the current monetary stance. It is crucial in terms of an inflation targeting regime. Confidence in current monetary policy is indeed a very important tool. We value this and, clearly, the loss of trust would entail the loss of the monetary policy toolkit.
Therefore, it is imperative that we achieve the inflation target next year.
Now on to question one. Sure enough, this will lead to nationalisation since NWF funds are essentially public funds, and this is the case of government ownership of these companies. We will look into proposals on a case-by-case basis. I have yet to see their details to understand whether they involve subsequent public offerings or other options. We need to see the details.
QUESTION from Frank Media:
This spring, both the Ministry of Finance and the Central Bank came up with the idea of floating the partially redeemed shares of foreigners. That is, such proposals were made. Judging by recent trades, the proposals have gone nowhere. Even in the case of the Moscow Exchange — of which the Bank of Russia is a shareholder — the shares were bought back and no additional shares were floated. Is our understanding correct: the proposals were ditched and, ultimately, large companies ensured they have the preferred right to purchase discounted shares in foreign companies?
And another question, please. The Russian President suggested that the Central Bank and the Ministry of Finance develop some KPIs for the Long-term Savings Programme. Could you present your tentative designs, that is, how many participants is the Long-term Savings Programme set to involve, and when?
And the third question. As your former first deputy Mr Shvetsov proposed on repeated occasions, since the exit of many active minority shareholders (who were foreign owners and are now in C accounts), the regulator should lead this process and come up with an administrative response to somehow influence corporate governance and protect the rights of minority shareholders. Are you supportive of this position? If so, what measures do you support?
ELVIRA NABIULLINA:
The first question is about the issuance of additional shares. This is a government commission requirement and, as far as I know, it is in force. Why are there no initial or secondary public offerings? This is due to the statutory timeframe, which is, to the best of my knowledge, between one and three years. When a new owner comes, the company has to prepare corporate governance, the company itself, for an offering. A certain timeframe is stipulated. The Government commission will monitor how these obligations are met. I hope that we can see these obligations are being complied with since they are statutory requirements.
Now on to the second question about KPIs for long-term savings: the discussions are underway. We intend to unveil the KPIs once they are finalised.
On corporate governance, this subject is very important. We can see that sanctions and external restrictions have propelled us to loosen a number of procedures. We have also suspended disclosure requirements such as procedures for protecting the rights of minority shareholders, including those pertaining to access to information and others. That said, an administrative response can hardly deliver, in my opinion, and we need legislative action. We need to reinstate most regulations that were eased.
We could do this through recommendations. In a state-owned company, owners can exercise administrative influence over corporate governance. However, since we are not business owners, the issue should be addressed through legislative rules.
Thank you for your attention.