Elvira Nabiullina’s speech at joint meeting of State Duma committees on Monetary Policy Guidelines for 2024–2026
Good afternoon, dear colleagues.
Today, I am presenting the Monetary Policy Guidelines and, as Mr Aksakov has said, this document is now actively discussed in the course of working meetings at the State Duma. We have been amending it considering both the results of these discussions and deputies’ recommendations.
Firstly, I would like to speak on how we view the situation in the economy and what we have been doing to maintain price stability, which actually means steady economic growth, and I would like to stress this. The rationale behind our monetary policy decisions is detailed in the Monetary Policy Guidelines. Therefore, at the end of the statement, I will present the forecast that is also part of this document.
We can now see many parallels between the current situation and the period two years ago when the economy very quickly restored after the pandemic as well, as you remember. After the cancellation of all restrictions then, demand started to surge, but enterprises were unable to ramp up output that fast, lacking labour resources and experiencing disruptions in supplies of raw materials and components. Consequently, a side effect of the post-pandemic recovery was soaring inflation, which we were also combating by raising the key rate.
This year, as soon as demand and the output of goods and services in the economy bounced back to the pre-crisis level, namely in 2023 Q2, inflationary pressure began intensifying even more rapidly than in 2021.
I would like to emphasise that, in contrast to the spike in prices in spring 2022, this acceleration was caused by other factors. The economy then was adjusting to the new conditions, while businesses were searching for new suppliers and sales markets amid the sanctions and entering new niches that were available after Western companies’ exit from the Russian market. The spike in prices was necessary to ensure that such an extensive structural transformation could progress quickly and less painfully for the affected industries and that companies could have room for manoeuvre during that challenging period. Besides, current price growth in 2022 H2 was close to zero.
I would like to remind you that we returned the key rate from 20% set in spring to 7.5% by September and maintained it at this moderate level until July 2023, even though inflation expectations were persistently elevated. Coupled with expansionary fiscal policy and the Government’s policy in general, this ensured a much faster rebound of economic activity to the levels of late 2021. As you remember, nobody could have expected such a quick restoration of the Russian economy.
We started to raise the key rate when it became obvious that inflation had been accelerating not due to direct or indirect effects of the sanctions, but because of a large gap between soaring demand and the potential to ramp up supply. This is exactly what Mr Aksakov has just said about. The surge in both consumer and investment demand (as both these components affect inflation) was driven by affordable credit, rising inflation expectations, and increased budget spending.
I would like to reiterate that we are currently in a situation when the economy is using almost all resources available, including personnel and production capacities.
Unemployment dropped to 3% or even lower in some regions, which means that the economy has almost no additional labour resources. The situation with personnel is really very complicated, particularly in the industries that have already surpassed the pre-crisis level, specifically in machine building and chemical production.
We are surveying a large number of companies. This monitoring shows that most businesses are experiencing staff shortages and a deficit of highly qualified specialists. When competition for the same employees becomes more acute, labour productivity increases more slowly than wages. In other words, the expansion of output turns out to be smaller than the rise in people’s incomes. If households use these additional funds for purchases, this will not increase consumption quantities, but will simply push prices for goods and services higher, that is, people will just be overpaying for the goods and services they consume. Our task is to avoid a situation where inflation is absorbing wage rises and to maintain the growth of real incomes. Combating inflation, we are struggling to support the growth of people’s real incomes.
A further expansion of the economy is possible through increasing labour productivity. This is a complex process requiring not only available funds and equipment, but also qualified personnel and management staff. Therefore, there are three conclusions to be made.
The first one is that a balanced economic growth path, that does not imply simply an expansion paid for by people, cannot be as fast any longer as during the recovery period. The restoration was definitely rather quick.
Secondly, any efforts to spur economic growth in these conditions through more affordable credit or any other large-scale drivers of demand would only induce faster inflation and nothing more.
The third conclusion is that growth largely depends on investment which in turn requires more savings. However, a larger amount of savings in the economy is only possible when interest rates are higher.
The depreciation of the ruble in recent months was also associated with soaring domestic demand to a great extent. In 2023 H1, the exchange rate was primarily affected by plummeting exports — the slump was about 30% compared to 2022. Export quantities and commodity prices were decreasing simultaneously with a quick rebound in imports.
In other words, the Russian economy was receiving a smaller amount of foreign currency, whereas the amount of rubles used to purchase imported goods and equipment was increasingly growing.
From the middle of the year, the ruble started to weaken again. Moreover, the depreciation was much faster amid a quicker expansion of demand spurred by credit activity, among other factors. Besides, the potential to ramp up domestic output had been exhausted, and the lion’s share of the demand increase was translating into higher demand for imports, boosting imports rather than domestic output.
However, that was exactly the rise in the demand for imports in ruble terms, whereas export earnings did not increase. What is happening when the demand for imports in ruble terms is rising, while the inflow of foreign currency earnings from exports stays approximately at the same level? In this case, the ruble exchange rate declines even though the value of exports in US dollars remains nearly the same. The depreciation of the ruble that began in July—August was not already a shift in response to the changed external conditions, but rather was largely associated with persistent inflationary pressure inside the country.
The amount of rubles to be used to buy a similar amount of US dollars, yuan, euros and other currencies increased, including due to high credit activity. According to recent figures in annualised terms, the growth of the corporate portfolio reached 19.5% in September, before the beginning of October, which is a high rate. Speaking of the increase in ruble loans, foreign currency loans were being substituted for ruble ones, and the growth in this segment reached 31.5%, which was covered by the banking system. Over the three months alone, namely July—September, the corporate loan portfolio expanded by ₽3.9 trillion. This is the amount raised by real sector companies.
When interest rates are not very high, as opposed to inflation expectations, which is aggravated by the depreciation of the ruble, companies opt to raise ruble loans rather than use foreign currency liquidity. This was also exerting pressure on the ruble exchange rate.
By raising the key rate, we responded to the ruble weakening as well. As you know, we are always saying that keeping the ruble exchange rate within a certain range is not our objective, but its dynamics are definitely a sensitive indicator of the state of domestic demand and, in addition, affect inflation expectations. Accordingly, monetary policy that is aimed at maintaining low inflation will also stabilise the exchange rate. Our policy helps prevent a self-sustaining process of devaluation induced by an inflation spiral, which is a hazardous thing. This is evident from countries keeping interest rates below inflation for a long period and, consequently, facing such an inflation spiral and, concurrently, devaluation.
When we were making our key rate decisions, including the recent one in October, we were primarily guided by two factors.
In the first place, this was price pressure which remained high, reflecting how considerably lending, domestic demand and the resulting proinflationary effect had increased by the middle of the year. Suffice to say, current price growth in Q3 exceeded 10% in annualised terms.
Secondly, in October, we took into account the updated parameters of the budget projections implying more expansionary fiscal policy. As we have been repeatedly saying before, to offset an increased fiscal stimulus, we need tighter monetary policy to be able to maintain price stability and steady and well-balanced economic growth. This is crucial to avoid overheating followed by downturns and prevent credit and financial ‘bubbles’ in the economy. Considering these circumstances, in October, we raised the key rate to 15%, while giving a neutral signal. Our forecast of the key rate assumes that it can be both raised or kept at the current level over the remainder of the year. Everything will depend on future developments, primarily the dynamics of inflation expectations and lending.
It should be noted that we can already see the response to the key rate increase.
First of all, an important shift happened in September, that is, people started to return cash to banks. I would like to remind you that we had been observing a persistent rise in cash in circulation from last autumn as people preferred to have cash holdings. Currently, deposit rates have become attractive again reaching
Secondly, the growth of lending is starting to slow down, although diversely in different segments. Unsecured consumer lending has responded most significantly. Specifically, its monthly increase approximated ₽1 trillion in July—August, but slowed down by a third in September, according to preliminary estimates. Growth in mortgage lending in September (comprehensive data for October will be available later) hit a record high, driven predominantly by subsidised programmes with fixed interest rates, and the demand for such loans has even risen now after the key rate increase. Nevertheless, we expect the mortgage lending segment to cool down to more balanced growth rates as well, that is, the growth rates that would ensure a more moderate rise in new housing prices because, otherwise, these programmes would not make housing more affordable for people.
Thirdly, the ruble exchange rate is stabilising thus showing a response to the key rate increase. The key rate has a direct effect simultaneously on two factors impacting the exchange rate, in particular imports and the demand for rubles as a store of value. The demand for imports in ruble terms, that I have already mentioned above, started to grow more slowly, while companies’ and households’ demand for ruble deposits is rising. All else being equal, a higher level of the key rate helps strengthen the ruble. The rebound in exports and the executive order on the mandatory sale of foreign currency earnings by major exporters have also helped reduce the volatility of the exchange rate.
Fourthly, households decreased inflation expectations in October. We can also observe that the rise in businesses’ price expectations has become much slower as well, although they remain at a very high level of April 2022.
It will take several quarters for the key rate increase to fully translate into the economy. This is how the transmission mechanism is functioning, which is also described in the Monetary Policy Guidelines: first, deposit and credit rates change, influencing people’s and companies’ behaviour. This chain is quite long and takes time, but its effect is unquestionable.
According to our forecast, inflationary pressure reached its peak back in Q3. Annual inflation will start to decelerate only in spring, but this is simply the base effect of low inflation in 2022 H1. We predict that inflation will return to its 4% target by the end of the next year.
I would like to say a few words about our forecast.
As usual, our baseline scenario assumes that the world economy continues to develop within the already existing trends. Inflationary pressure remains high in many countries. Central banks in advanced economies will have to pursue tight monetary policies for a long time in order to temper inflation. Higher interest rates will hinder global economic growth, which implies that the demand for Russian exports will be more moderate.
The transformation of the Russian economy will progress further during the next two years. As I have already said, the growth rate of GDP will become more moderate after its very quick rebound, which is associated exactly with the completion of the economic recovery. We estimate that the Russian economy will return to a balanced growth rate of
We will have to pursue tight monetary policy for several quarters to be able to bring inflation back to the target by the end of 2024. The expansion of lending will decelerate, but I would like to stress that, according to our forecast, lending growth rates will remain positive, that is, they will be still contributing to the development of the economy.
As soon as inflation starts to decline steadily, we will be able to switch to a gradual reduction in the key rate. If the situation evolves according to our baseline forecast, the key rate will decrease below 10% in 2025 and stabilise at a level that we now estimate as neutral, which is
In addition to the baseline forecast, we always prepare alternative scenarios to be able to adjust our monetary policy to various developments. First of all, I would like to speak of potential risks.
Obviously, this is the risk of a more complicated situation in the world economy. This might result from faster fragmentation and countries’ division into blocks in global economic relationships, as well as, under a tougher scenario, might be caused by materialisation of financial stability risks accumulated by the global financial system over recent years. The alternative scenarios assume that inflation will return to 4% not in 2024, but in 2025, and this process will require much tighter monetary policy.
The first alternative is the Stronger Fragmentation scenario implying that the process of countries’ division into regional blocks might intensify. This process will be undermining global trade and economic growth and will involve a reduction in the demand for core Russian exports and a possible toughening of the sanctions. In the case of this scenario, the Russian economy will continue to grow, but more slowly during the next two years than predicted in the baseline scenario.
The second alternative is the Risk scenario where a toughening of the sanctions and deglobalisation are combined with a recession in advanced economies. It should be noted that markets do have such concerns, and they have even been increasing recently. A recession might be provoked if the US Fed and the ECB continue to raise their policy rates that have already increased notably in response to faster inflation. By the way, these are direct implications of the generous fiscal stimulus packages approved by the regulators to revive the economy during the pandemic. I think that we should learn from their experience to comprehend how easy it is to miss the moment of inflation spiralling out of control and how hard it will be then to put this genie back into the bottle.
If the US and the euro area raise their policy rates further, it is entirely possible that the imbalances and vulnerabilities, quite high interest rate risk and large debts accumulated in many countries over the period of ultra-accommodative monetary policies might cause a domino effect, which might entail a global financial crisis. In this case, just as during the
Nevertheless, I would like to emphasise that, whatever the scenario, we have efficient instruments to ensure price stability. This is crucial for balanced economic growth and a rise in people’s real incomes. We should not ease up if we want to succeed. We will need to decelerate inflation anyway, but from a higher level if it spirals out of control. In this case, we would have to pay a heavy price to restore price stability, and the implications for the economy in general, businesses and people could be much more severe. I firmly believe that a timely monetary policy response will help us avoid a negative scenario.
Thank you for attention.