Elvira Nabiullina’s speech at State Duma’s plenary session

Good afternoon, Mr Volodin. Good afternoon, esteemed deputies.

To get prepared for this session, my deputies and I held meetings with all the parliamentary fractions to discuss various issues, but the scope of topics was very similar, including the key rate increase, loan affordability, and the impact of monetary policy on economic development and people’s welfare. There were a lot of questions about the exchange rate of the ruble. Of course, this shows what are Russian people, voters are concerned about.

Before proceeding to the main issue, I would like to thank the State Duma for supporting the development of the financial market and protecting financial consumers’ rights. I would like to mention just a few laws approved in the course of the recent spring session, including the law increasing banks’ liability for protecting people’s funds against fraudsters, the law on fee-free money transfers between a person’s accounts with various banks, the laws on the long-term savings programme, the permanent mechanism of loan repayment holidays, partnership financing, and the digital ruble. I would not list everything, but I should stress that the laws approved are critical for enabling people to use all the opportunities available in the financial market.

Returning to the topic of monetary policy, we are aware that many are concerned about the key rate increase. But believe me: all our calculations and experience prove that if we had not done this, if we had not responded in a timely manner, losses for people, businesses and the country could have been much larger. We raised the key rate commensurately with the inflationary pressure that had emerged in the middle of the year. Let’s look at the factors forming that pressure.

It has been noted many times that the economy rebounded from the crisis much faster than expected in any forecasts and continues to expand. This is related to industrial production, consumption, and fixed capital investment. For the first time over many years, we are recording quick growth in manufacturing. As you can see, the recovery in mining and quarrying is hindered as commodity exports have contracted due to the sanctions. Nevertheless, the overall situation in the economy is positive.

In order to support its restoration, we cut the key rate sufficiently quickly last year from 20% to 7.5% per annum and were keeping it unchanged until this July. 

Throughout this period, loans were very affordable. Retail and corporate lending was soaring by about 20% or even faster in year-on-year terms. Previously, we were observing such high growth rates more than ten years ago, at the beginning of the 2010s.

Let’s see how corporate lending was developing. The surge by nearly 20% in 2023 was the fourth consecutive year of an accelerating increase in the corporate segment. Over the past 12 months, the corporate loan portfolio expanded by ₽11 trillion. Companies were actively borrowing funds for investment, housing construction, fulfilment of government orders, and business acquisitions from foreign companies exiting the Russian market. Besides, enterprises were substituting foreign currency borrowings for ruble loans.

What do these figures mean? They actually mean that any talks about low affordability of loans are exaggerations, to say the very least.

Assessing the affordability of financing to the economy overall, it is essential to remember that companies’ profits also resumed an upward trend at the end of last year.

Over the first eight months of 2023, financial performance already exceeded the figure for the entire 2019, before the pandemic. Over this year in general, it might be twice as large as the pre-pandemic result, considering the current trends, if businesses continue to earn ₽2.5—3 trillion monthly. In this case, companies’ financial performance will come close to the record of 2021.

Hence, enterprises’ profits now can and shall be an important source of investment and growth. This is also evident from various measures showing that businesses remain very optimistic despite a high cost of borrowings. Equity is always the main source of business growth, whereas credit is just additional support enabling a more significant leap.

Household lending has also been demonstrating an upward trend, especially in mortgages where annualised growth rates are very high, namely 32%. In other words, the mortgage loan portfolio expanded by a third over the past 12 months. We are certainly concerned that this increase is accompanied by a rise in housing prices and a decline in the quality of loans as long as mortgages are issued to borrowers whose debt-service-to-income ratios are already high. In the future, this might induce high risks for both banks and, which is even more important, for borrowers themselves.

The problem is that developers are unable to increase the number of housing construction projects quickly. Accordingly, the surge in mortgage lending is largely translated into rising prices for housing. On average, new housing prices in Russia have soared by 90% over the past three years, that is, they have nearly doubled. This is twice as fast as the growth of the average wage over the said period. For example, the gap between new and existing housing prices was about 10% in 2020, but soared manifold after the launch of subsidised mortgage lending. Today, it already reaches 42%, which cannot be explained by the natural difference between the quality of new and existing housing. Thus, if one purchases an apartment from a developer for, let’s say, ₽10 million, it will only be possible to sell it for ₽7 million on average. This is a huge imbalance. Moreover, it is even larger in some regions.

In my opinion, it is absolutely obvious that people’s savings through subsidised mortgage rates should not be wiped out by the rise in housing prices. Extensive subsidised programmes are certainly very useful as a temporary anti-crisis measure when demand is plummeting. However, later on, it is reasonable to switch to targeted subsidised mortgage programmes or, at least, differentiate them across regions where the pace of housing construction and housing availability are low.

In addition to credit, demand in the economy was also boosted by higher budget spending through government orders, investment, and payments. I would like to emphasise that this was a crucial factor that sped up the rebound in the economy. However, when the economy surpassed the pre-crisis level, inflationary pressure started to soar because demand was growing further, fuelled by higher incomes, credit activity, and budget spending, whereas opportunities to ramp up output were, to the contrary, decreasing.

Now, we are approaching the issue that we were extensively discussing at the meetings with the fractions and the working groups at the State Duma. How can it become difficult to expand production even when credit is affordable? In this regard, it is essential to comprehend that money is not always a determinant. Money can be used to purchase the resources needed for manufacturing, but money itself is not a physical resource that could be used to make a certain item or perform a certain job.

We can see that these are physical resources, primarily personnel, that are becoming increasingly limited. This is the staff deficit that companies have been complaining about as their main and increasingly acute problem, and we have a large sample of businesses across the country that we survey on a monthly basis.

Our surveys show that businesses do have funds and have no problems with demand, but they need additional equipment and personnel to be able to quickly expand production. It is possible to lure employees away from neighbouring enterprises, but in this case, the latter will face a decline in output. At the level of the national economy, competition for the same labour resources is a reason why wages grow faster than labour productivity. Besides, it becomes easier for businesses to pass on their rising costs to consumers because their incomes are always going up. It becomes even easier when interest rates are moderate and inflation expectations are high, making people spend money more quickly before their savings depreciate.

This is exactly the situation that we were observing in summer, but it was exacerbated by the ruble weakening that was a matter of concern for everyone.

The exchange rate of the ruble mostly depends on trade flows, that is, the amounts of foreign currency received from exports and paid for imports. When export revenues grow amid shrinking imports, the ruble is strengthening. This was the case last year when the US dollar was declining even below 60 rubles. However, as you can see from the slide, exports plummeted by nearly a fourth over the year, whereas imports expanded. Accordingly, the ruble was weakening amid these changes.

It is widely believed that the acceleration of inflation in the middle of the year was fuelled by more considerable ruble depreciation. However, it is worth noting that the causality in this case is mutual, or rather reverse. The higher is actual and expected inflation, the weaker is the national currency.

The weakening of the exchange rate that started in the middle of the year was caused directly by the situation where elevated domestic demand, because of domestic production constraints, was pushing up the demand for imports. But 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 growing, while the inflow of foreign currency from exports remains approximately the same? The ruble is depreciating. In other words, as opposed to the first half of the year, the ruble weakening that started in July—August did not result from contracting exports, but was predominantly associated with persistent inflationary pressure inside the country and growing expectations of devaluation.

It would be a mistake to believe that it could be possible not to raise the key rate in such a situation to maintain credit affordability at the previous level. Banks would never issue loans at a loss when interest rates are below inflation because there are depositors standing behind them.

Moreover, the key rate only influences short-term lending, whereas the conditions on mortgages and investment loans largely depend on inflation expectations. If prices are rising, while we are doing nothing, advocating that loans should remain affordable, banks would increasingly pass through expected high inflation to the cost of long-term borrowings. Banks would do this not to increase their profits, but rather because their depositors would also seek to receive higher returns fearing future inflation.

We were to take decisive measures in order to prevent inflation from spiralling out of control and not to disrupt the growth of households’ real incomes as they are directly affected by rising inflation. Increasing the key rate to 15% per annum in October, we also took into account the new parameters of fiscal policy which imply that it will be more expansionary. Accordingly, it should be offset by tighter monetary policy. In other words, monetary policy tightening does not decrease future growth rates that are possible for the economy, but rather prevents the fiscal stimulus from being wasted to only fuel inflation.

In this regard, I should also speak about how we estimate inflationary pressure. There were many questions about this in the course of our meetings. Sometimes, we are reproached for having raised the key rate too much, so that it is now twice as high as inflation.

First of all, annual inflation has been persistently accelerating from June and today exceeds 7% already. Compared to our target of 4%, this acceleration cannot be considered harmless. Secondly, we are frequently saying that annual inflation is like a rear-view mirror, that is, it shows upward and downward slopes behind rather than what is ahead. The same is about annual inflation that currently includes the very low rates of late 2022 and early 2023.

Making our key rate decisions, we analyse current inflation and how prices are growing month-on-month. I would like explain this using the chart, although it might appear to be a little complicated. Monthly price increases are in the pink area reflecting the rate of inflation experienced by households and businesses at a particular moment. This is the level they are guided by when making their decisions. Obviously, it has been considerably above the annual inflation rate (the red line) beginning from summer.

When we made our recent key rate decision in October, we had the statistics for Q3 showing that current price growth rates already exceeded 12% in annualised terms. The annual rate was below 7%, but current growth rates already exceeded 12% at the moment. Current price growth rates edged down in October, but are still extremely high. Accordingly, they will be pushing the annual inflation rate higher.

Of course, it would be better if a key rate rise had an instantaneous effect, but this is impossible. This chain is long and the transmission takes time, namely from three to six quarters, because banks are revising their credit and deposit rates gradually. People and companies also respond to new interest rates not immediately.

Nevertheless, we can already see the first effects.

1. Specifically, credit activity is becoming better balanced, first of all in unsecured consumer lending. Corporate lending continues to expand fast. Apparently, the increase in consumer lending has already started to slow down, but the growth rates in this segment were very high.
2. Imports have begun to contract, and the pressure on the exchange rate is also weakening — a higher key rate strengthens the exchange rate, all else being equal.
3. There was an important shift in people’s behaviour: they have started to return cash to banks. Over September—October, households returned ₽200 billion to deposits. As you remember, in spring and autumn 2022, people were actively withdrawing the funds from bank deposits, opting to have cash holdings, whereas now they understand that deposit rates of 13%, 14% and even 15% are advantageous. This is the result we expected to achieve when raising the key rate. Deposits will continue to grow in the next few months. This helps protect and increase the purchasing power of savings.

What else makes this important? Banks issue loans not from their own funds but from deposits. Accordingly, a steady rise in deposits is a critical condition to ensure affordability of investment loans.

Of course, these are small and medium-sized enterprises (SMEs) that are concerned about interest rates the most. We are monitoring carefully this situation. It is essential that there are subsidised programmes for SMEs, and one of them is implemented by the Bank of Russia jointly with the Government — the so-called combined programme. Today, SMEs can raise loans at 9% and 7.5%, respectively, under this programme. Together with the Government, we made the decision to extend it until 2030. Beginning from 2024, we will concentrate the resources that the Bank of Russia allocates to support SMEs exactly within this programme.

In order to support lending for the projects that are vital for the national economy, in June 2023, we introduced incentive-based banking regulation based on the so-called taxonomy. Now, banks will be able to considerably reduce the load on capital, in some cases twice or thrice, for the loans that are crucial for import substitution and technological advancement. The criteria of such projects were stipulated by the Government. The register of such projects kept by VEB.RF comprises projects for manufacturing electric vehicle batteries, metro cars, ships, etc. As of early October, their value totalled ₽210 billion, and this is only the beginning. As I have already said, the regulation was amended only in June. It will take time to implement the modifications. We expect that the number of such projects will increase. Of course, the incentives for banks are not enough. In the first place, we need high-quality and profitable projects that banks will be able to finance without excessive risks for their creditors and depositors.

Winding up, I would like to comment on our forecast.

Our baseline scenario assumes that we will bring inflation back to the 4% target in 2024 and, accordingly, will be able to start cutting the key rate. However, the key rate will stay high for a certain period needed to slow down the flywheel of inflation and to ensure that the economy has used the record amount of loans issued over the past 12 months. Nevertheless, I would like to assure you that this is crucial for balanced and stable development in the future.

I would give one figure showing how harmless inflation is for people. Balances in people’s ruble accounts and deposits and the amount of cash in circulation currently total a little less than ₽60 trillion. This means that the price of inflation acceleration by another one per cent over the year is ₽600 billion from people’s wallet. The key rate increase and the resulting growth in deposit rates help offset these losses incurred by people and reduce the implications of inflation for their welfare.

I would like to emphasise separately that the key rate kept at a high level during the period of high inflation does not mean that lending will stop. Corporate, mortgage and consumer lending will continue to expand, although more moderately, but this pace will be better balanced and will not be accelerating inflation.

We also prepared alternative scenarios of the forecast to assess risks associated with possible toughening of the sanctions, a decline in the demand for core Russian exports, and a global financial crisis, in order to be prepared to any developments. These two scenarios assume that we will bring inflation back to the target a year later — in 2025 and, to achieve this, might need tighter monetary policy.

To conclude, I would like to say a few words about our tasks for the near future.

1. In addition to inflation deceleration, another crucial task is to develop the capital market. Credit is not the only way to raise funds for business development. Moreover, this source of funding is not always possible because over-indebtedness is as bad for the economy and companies as for individuals. We have been talking a lot about debt burden among households. This was one of the main topics in the course of all our discussions.
   
   Of course, companies should be more active in equity raising and IPOs and enter the bond market. This is much more complicated than to simply raise a loan. They will need to disclose information about their business, being aware of all the sanction risks and the sensitivity of information — by the way, sensitive information is inaccessible now — as well as to develop corporate governance. However, this provides much more opportunities for both businesses and the economy in general. In the first place, we need to create instruments for people’s long-term investment, for their savings. Therefore, I would like to reiterate that the law adopted in spring 2023 is crucial. Besides, at the parliamentary sessions in December, we will discuss both the development of the financial and capital markets and the measures needed to employ this source of development that is currently not used.
2. Secondly, it is essential to promote confidence in the financial market, including through accessibility of information for investors, national ratings, market indices, and the protection of investors’ and shareholders’ rights. All this is relevant for the capital market as well and also implies anti-fraud measures in the market because fraudsters undermine confidence in the financial market. This is one of the reasons why we believe that the widely supported draft law on a self-ban on loans, which is currently considered by the State Duma, is crucial.
3. The advancement of the system of international payments and settlements is another critical task to help businesses enter new export markets and make imports needed for modernisation more accessible. This is a whole range of problems, and we should be very flexible and creative in order to address them successfully.
4. The digital ruble is another topic that we were actively discussing with the fractions. This is one of our key projects and the third form of money in addition to cash and non-cash rubles. All the three forms of money will be equally important. However, I would like to stress that only a person is to decide whether to use cash, a bank card, or digital rubles to make a payment. We expect that all digital ruble transfers will be fee-free for individuals.

These are only some of the topics that we are dealing with and that, in addition to monetary policy, influence economic development and people’s welfare. We will be certainly discussing with you all the legislative initiatives associated with the implementation of these ideas. I would like to thank all the deputies once again for the open and meaningful dialogue. We are also very interested in such communication.

Monetary Policy Guidelines for 2024–2026 (presentation)