Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 15 December 2023
Good afternoon,
Today, we have made the decision to raise the key rate to 16% per annum.
Inflation and inflation expectations remain high. The key difference between the current economic situation and our October forecast is the expansion of output. New data suggest that the economic growth has deviated from a balanced path more significantly compared to our earlier estimates. This deviation is a factor intensifying persistent price pressure. To alleviate this pressure, we need not only a high key rate, but also its elevated level for an extended period.
I would now dwell on the rationale for our today’s decision.
Firstly, as regards inflation.
Current price growth remains fast. The persistence of price pressure is evident from the dynamics of core inflation. Its growth rate has been above 10% in annualised terms for four consecutive months.
The impact of the earlier ruble depreciation on current inflation is becoming increasingly weaker. The decline in the ruble exchange rate that had occurred in summer was translating into prices quite fast. Overall, the pass-through has almost completed now, taking into account the ruble strengthening in autumn. These are prices for the components of the consumer basket weakly influenced by the exchange rate that are rising most quickly today. Thus, over the past three months, the growth of prices for services excluding housing and utility services exceeded 14% in annualised terms. The accelerated rise in prices for services is considered as an indicator of persistent inflationary pressure in the economy because these prices tend to respond to the exchange rate and various one-off factors less significantly. The dynamics of prices for services in the first half of the year partially followed the earlier surge in other prices, whereas now this is high demand that is the main factor pushing service prices higher.
Strong demand is supported by high inflation expectations among businesses and households. In November, people’s inflation expectations rose even more. Companies’ price expectations have been staying at their peaks for several months already.
Considering the actual price movements, this year, inflation will reach a level close to the upper bound of our forecast, that is 7.5%. Next year, inflation will be slowing down, including due to our earlier monetary policy decisions. Taking into account the current level of price pressure, we might need a longer period of higher interest rates to achieve the inflation target next year.
Secondly, the economy.
GDP growth in the third quarter was notably faster than expected. Recent data evidence that the trend continued in the fourth quarter as well. The economy is expanding so rapidly because it is using almost all the resources available. In October, unemployment dropped to 2.9%, which is a new record low. According to our regional branches, the intensity of labour utilisation has been growing. Increasingly more manufacturers are extending the working day and adding work shifts.
The actual capabilities of the economy determining its potential depend on labour resources along with available technologies and production capacities. A stubborn high inflation is evidence that the economy has deviated from its potential and lacks capacities to meet soaring demand.
If we had ignored high inflation and had not been tightening monetary policy, this would only have had a negative effect on the economy. Imagine the economy as a car. If you try to drive faster than allowed by car specifications, the engine will overheat sooner or later, and we will not be able to travel a long distance. Possibly, we will be driving fast, but for a short period. When the economy is overheated, that is, it lacks sufficient production and labour resources, the manufacture of each new item would involve increasingly more difficulties and continuously rising costs. The attempt to support the growth of the economy at a level exceeding its potential through accommodative monetary policy would entail price growth that would be absorbing households’ savings and rising wages more and more. Ultimately, we would be unable to ensure an actual rise in people’s welfare. This is exactly what we are seeking to avoid by bringing inflation back to the target and returning the economy to a balanced growth path.
Thirdly, as regards monetary conditions.
The banking sector continues to adjust to the key rate increase. The inflow of funds in the deposit market has been expanding, driven by higher interest rates.
The credit market’s response is uneven. There are the first signs of a slower expansion in corporate lending, but its growth rate is still at a record high, especially in the segment of short-term loans. Some companies have been raising such loans to finance their current operations expecting budget payments that are normally made at the end of the year for the most part. Companies’ demand for loans is supported by high price expectations, as well as expectations of strong domestic demand. This is confirmed by business surveys in Russian regions. More details about economic activity, price expectations and lending in the federal districts are available in our Regional Economy report.
Retail lending, especially the mortgage segment, continues to surge. Although the expansion of market-based mortgage lending has slowed down, the extensive subsidised programmes have been notably weakening the transmission of our decisions. The proportion of subsidised mortgages is still growing. In November, such loans accounted for 80% of all mortgages issued. In recent months, the increase in unsecured consumer lending has been decelerating compared to its record highs.
Next year, monetary conditions will be tightening because of not only the key rate, but also a number of other factors, including the cancellation of the easing related to banks’ liquidity coverage ratio and the already implemented macroprudential measures. All this can reduce banks’ risk appetite.
Now, I would like to speak of external conditions.
Regional trends in the world economy remain diverse. Overall, economic growth tends to decelerate. The downward trend in the global economy causes an adjustment in the demand for commodities, including oil. This is a major factor of the contraction of Russian exports over the past two months. Although with a certain time lag, this might entail a reduction in foreign trade earnings. Nevertheless, the OPEC+ agreement on oil production cuts will support oil prices in the future. Besides, imports have been shrinking as well, although less considerably compared to exports. The monetary policy tightening has been not only affecting import dynamics, but also contributing to the stabilisation of the ruble.
I will now speak of possible risks. Proinflationary risks still prevail.
The main one of them is high inflation expectations that might weaken the response of demand to our decisions. Geopolitical risks and risks of a slowdown in the world economy still remain and might adversely impact the demand for commodities and, accordingly, the dynamics of the ruble exchange rate. Another proinflationary risk is a possible expansion of the subsidised lending programmes, if the government does not make them limited and targeted. In this case, the effect of the key rate on the economy will notably weaken and, consequently, we might need to keep the rate higher for longer.
Winding up, I would like to comment on monetary policy prospects.
The Bank of Russia will set the key rate at a level helping bring inflation back to the target by the end of next year. Until we are confident that there is a steady downward trend in price growth and inflation expectations, the key rate will stay high for as long as necessary.
Thank you for attention.
Q&A for the Media
QUESTION from TASS:
My first question is about the options the Board have focused on today. Was the option of a 2pp rate increase on the agenda? My other question is about mortgages. The President recently said that Family Mortgage could be extended. What is the Bank of Russia’s stance?
ELVIRA NABIULLINA:
We had a substantive discussion of two options: keeping the rate unchanged and a 100bp rise. There were a few proposals for a 200bp increase, but the substantive discussion was centred on these two options.
Now, regarding the Family Mortgage programme. In our view, it is just an example of a targeted programme. Overall, we believe that the universal preferential mortgage, launched as an anti-crisis measure, should end in July. While on the Family Mortgage standards, they need to be discussed, and that is certainly up to the government to decide.
QUESTION from Interfax:
Is it correct to say that the hiking cycle is close to completion or is over? And one more question, if I may. While you note a slowdown in credit activity across several sectors, you stress that credit expansion is still overly high. Are you planning on further macroprudential measures? You are not discussing the option of increasing the countercyclical buffer at this moment, are you?
ELVIRA NABIULLINA:
Judging by our baseline scenario, yes, we are probably close to completing the cycle of rate increases. However, everything will depend on how things develop and what trends the persistent components of inflations show. We will make specific rate decisions based on the incoming data and our forecast reviews. As a reminder, our core meeting is next, and we will update the forecast.
Now on to the slowdown in lending. We believe that the recent rate increases are having an impact, primarily on deposits, since we can see their prompt response. This is also true of loans, but we have seen only early signs of their response so far, in both retail and mortgage loans. The broadly applied preferential loans resulted in overall mortgages showing almost no signs of slowdown.
As for the macroprudential policy, it is the tool we use to limit lending to high-risk borrowers and stem risks to financial stability. We use our key rate to influence the volumes of lending, and it is our core instrument. That is, macroprudential policy cannot replace the key rate. That tool has an utterly different function. True, when we put such measures in place, we understand that their impact on high-risk loans may translate into an impact on the overall pace of lending. We take that into account when making key rate decisions.
QUESTION from Ossetia, Vladikavkaz (telegram channel):
According to Sberbank CEO Herman Gref, there is a gap of more than 35% between the prices in the primary and secondary property markets in Moscow. The gap may be smaller in the regions, but it is still significant. Clearly, once the mass preferential mortgage programme is over, the gap is set go down to
ELVIRA NABIULLINA:
Indeed, we believe that there are signs of an overheated mortgage market. One sign is exactly what you are talking about: the price difference between the primary and secondary markets. According to our data, it is now 42%. There are regions where the difference is larger still. There are regions where the difference is smaller. Before the large-scale preferential programmes were rolled out, the difference was 10%, not
The prices in the housing market also signal overheating. We can see that increased demand has in no small measure translated into rising prices. Doubtless, our position is that we need a certain cooling in the market. We should ensure that mortgage loans grow at a balanced pace, then the gap between the primary and secondary markets will trend downwards. The gap creates risks primarily for borrowers who may struggle to service their loans, while the prices for secondary housing may well decline by 40% on average. To prevent that, we need to make sure that overall demand for housing grows at a balanced pace without a gap this large.
QUESTION from Kommersant:
Any extended streak of above-potential growth has many side effects, which include suboptimal investments, among others. We have recently seen a surge in investment. Do you have any estimates, for the medium term, of whether this is a meaningful or negligible factor moving forward? How much of the undershoot of our growth potential is due to the wrong investment decisions being made? Are there any other side effects of long-term overheating?
ELVIRA NABIULLINA:
One of the key effects of long-term overheating — what we are discussing — is mounting inflation. As inflation increases and moves away from target, it brings negative effects, including for investments suffering from a decline in long-term credit. Meanwhile, long-term funding is primarily grounded in predictably low inflation, so from the perspective of sources of investment, rising inflation is a negative factor which signals a deviation from potential.
As regards suboptimal investment, it really is a very important question. The challenge of future development is not only about how much investment we have now, but about the performance of investment such that it enables productivity growth and rewards investors. Clearly, this positive output gap and this rate of inflation combine to distort the parameters of investment projects. This is a priority task, which is why we need to ensure a return to a balanced growth path. It is quite difficult to quantify the share of inefficient investments, but it is a very important problem from the perspective of quality. I would say that the quality of investment is of critical importance for our economy given its ongoing structural transformation.
ALEXEY ZABOTKIN:
A poorly informed investment decision will result in lower returns than its funding scheme assumes, leading to the accumulation of risks to financial stability considering that the emerging debt will potentially be bad. Therefore, the only method to address this problem is to set the economy back on a balanced growth path and make sure any serious output gap does not last long.
QUESTION from Argumenty i Fakty:
Can you explain why people are continuing to borrow despite the high interest rates? What fears are fuelling household inflation expectations? And a second question, please. Might a high key rate trigger a recession in 2024? Will you reduce the rate if you see a threat?
ELVIRA NABIULLINA:
We do not expect a recession next year. You are aware that our forecast, though we will update it in February, assumes
Now on to the first question of why people are borrowing at high loan rates. I should say that unsecured consumer loans are showing tentative signs of slowing, that is, that borrowers are indeed responding to the high rates. But people fear inflation overall, and the fear is that their savings may be impaired, so even with such high rates, borrowers’ high inflation expectations make the real rates tolerable. After all, what is the real interest rate for people? It is the market rate minus the rate of inflation they expect. So, if inflation expectations are high, the perception is that the real rates are not very high. That is why the Central Bank must raise the policy rate in response to rising inflation and inflation expectations.
As I have said, unsecured consumer lending is increasingly responding to the growing rates, but disbursements of unsubsidised mortgage loans — which people take out at market rates — are now growing at a slower pace, and the decline is approaching 30%.
This contrasts with subsidised mortgages. They are offered at unchanged and fixed rates, and their appeal for people is growing. The higher their inflation expectations, the higher the market rates and the more attractive subsidised mortgages are. Currently, inflation expectations average 12%, that is, people expect 12% inflation, but the mortgage rate is 8%. Clearly, that rate is very attractive. Certainly, subsidised mortgages have to be factored into our decision to raise the rate.
QUESTION from NTV:
You have recently raised the problem of labour shortages, on multiple occasions. Does the Central Bank have a way to address the problem? What about you at the Central Bank? Are you having staff shortages? And my second question, please. The Central Bank’s press release mentions increased prices for certain goods. I guess everyone knows the price of the product that is the talk of the town: eggs. Was the word ‘eggs’ mentioned at the board meeting today?
ELVIRA NABIULLINA:
Concerning the staff shortage problem, yes, we also have staff shortages, primarily shortages of qualified staff such as IT specialists, given the ongoing digitalisation drive in the entire financial market and the Central Bank itself. It requires us to prepare a large number of internal programmes. We have to address skills shortages in information security, which is a problem for the entire market, and we are no different.
Now, what is the way to address the staff problem? Since it is indeed a constraint on the expansion of output, our policy is influencing demand to ensure that it remains balanced and does not go down the drain, ensure it is not squandered by translation into inflation. It is imperative that we bring about rises in labour productivity, automation, and investment. It is important that they are effective and enable real growth in productivity, and that will mitigate the problem.
What we must take into account here is that the investments being made now will only pay back later. While investments do not bring immediate effects, demand is growing at this moment, and it needs to be balanced. We can see how many regions are tackling labour shortages and are looking for fallback options, hiring additional labour — which is all about the labour force participation rate — and they are extending or increasing the number of shifts. We see these effects in play. In some places, approaches to labour can be improved even without investment thanks to the labour pools available. That is, business is seeking to find solutions to the problem regardless. Nevertheless, the data on wages and business surveys suggest the shortage of labour is one of constraints on the expansion of production even when businesses are willing to expand.
Now on to the issue of eggs. Admittedly, headline inflation is an important indicator for us, but we also look into core inflation, the more persistent components of inflation. We are also mindful of rising prices in individual markets such as for food or tourism, with its volatile fares. We look into patterns of price growth to assess whether they are just one-time factors or the product of overall persistent inflationary pressures. We certainly analyse that.
QUESTION from Slozhny Protsent (weblog):
Allow me to continue with the subject of observed and expected inflation. Over the nine years that the Bank of Russia has targeted inflation, with the target being 4%, the rate of observed inflation has always held at least 8%. Even between 2017 and 2020, when official inflation was close to the Central Bank’s target, the observable inflation was always much higher. Therefore, three short questions: What is the cause, in your opinion, of the observed inflation rate being so stubbornly high? Do you think your 4% target, which people, unlike Rosstat, have never registered over the last nine years, is still a sound goal? Is the Central Bank fully comfortable with Rosstat’s methodology for calculating the consumer price index? Perhaps the Central Bank intends to propose that your Rosstat colleagues improve their methodology?
ELVIRA NABIULLINA:
True, there is a gap between the official inflation reading and peoples’ estimate of inflation, observed inflation. Beyond observed inflation, we monitor the expected inflation indicator for inflation 12 months ahead. Almost all countries report a gap between observed and official inflation. The gap is somewhat lower in countries with long histories of inflation targeting and slightly higher in our case. The gap grows as inflation accelerates, but observed and official inflation show approximately the same trend: an increase in one comes with an increase in the other, and vice versa.
Expected inflation is different, however. That is, both official and observed inflation can rise, but people may expect inflation to decline on the back of monetary policy decisions being made or other factors they can see that have affected inflation. For example, the domestic currency may weaken and then strengthen. It is imperative that inflation expectations are close to our inflation target. It is about anchoring inflation expectations. If inflation expectations are anchored and inflation deviates from target, which is our current case, a less aggressive rise in the key rate may be needed than when inflation expectations are high. We have just talked here about how inflation expectations affect the perception of tight or loose credit conditions, among other things.
As for Rosstat’s calculation methodology, Rosstat usually monitors current expenses and periodically updates the statistics. If it does that, we will also be ready to participate in the process.
ALEXEY ZABOTKIN:
Rosstat’s statistics on consumer prices are updated regularly, on an annual basis. Therefore, when the January data on inflation come out, Rosstat will specify the basket based on which next year’s inflation is to be calculated. This update is based on observed consumption patterns, and the basket is made up of the items that most influence consumption patterns. This technique is based on global best practices.
The discrepancy between Rosstat’s inflation and its public perception depends on how people think about price growth. This is due to the fact that more importance is attached to goods showing higher price rises. As the Governor has mentioned, higher inflation means that there are more and more such goods, which results in a mounting gap between observed and statistically measured inflation. The best way to set observed inflation on course towards its statistical measure is to have low inflation.
QUESTION from RBC:
My first question is about inflation. Your statement says that it is taking shape to sit in the upper bound, but both analysts and the President have more pessimistic views of inflation. They expect it to go beyond the bound and approach 8%. Is the Central Bank likely to revise its inflation forecast for 2023 by year-end? What is the determining factor in a potential revision of the 2024 inflation forecast ahead of the core meeting in February, and is such a review possible?
ELVIRA NABIULLINA:
Our current forecast says that inflation in 2024 will be close to the upper bound of our October forecast, that is, 7.5%. It might go slightly above that mark, depending on how price trends evolve in the final weeks. Weekly inflation is known to be rather volatile.
As for the analysts, I would say their forecast is not much different from ours: 7.6% according to our survey.
We leave the 2024 forecast unchanged. We believe that our monetary policy stance will result in
QUESTION from Bloomberg:
The yuan has been the main currency of Russia’s international reserves since early 2022, but it has since fallen 7% against the dollar, and yuan rates are much lower. Can you see any risks to the value of yuan reserves? Are you allowing for the option of diversifying into other currencies, such as those of Middle Eastern countries, and using them as reserve currencies?
This is the last meeting of this year, so let us wish you well for the coming New Year. We wish you good health, and apart from that, we wish you success in achieving the inflation target of 4%.
ELVIRA NABIULLINA:
Thank you very much for the wish. It is a very good wish indeed.
Speaking of the yuan, as you know, currency fluctuations alongside changes in interest rates are typical of many reserve currencies. At the time both the dollar and the euro made up shares of our foreign currency reserves, foreign currency revaluation could have resulted in the emergence of unrealised loss. However, our case is not short-term investments. We have a real safety cushion for different worst-case scenarios. We see no risks to the safety of the currency. Although short-term fluctuations are not impossible, the foreign currency reserves remain diversified with a significant, even if to a lesser extent now, share of gold. Incidentally, gold has gone up in price, and we take this into account.
With regard to the diversification of gold and foreign currency reserves, it is not an option at present. Our view is that our foreign currency reserve structure enables us to address the tasks the reserves have been built up for, including first of all, preventing financial stability risks should they arise. Interventions are possible, for example in yuan, if they are needed. Interventions are implementable considering the complete adjustment of the economy generating demand not so much for dollars and euros, as before, but for the yuan. Therefore, we can rely on the yuan to conduct the operations for which foreign currency reserves are intended.
QUESTION from Moskovsky Komsomolets:
My first question is also about inflation. Following up on what you have told my colleague about your expectations that inflation will sit at slightly more than 4% by the end of next year, what would a reduction in this indicator be predicated on, in the view of the regulator? Could it be a bumper crop, oil at $100 a barrel, the launch of large-scale production of chicken and eggs, or other factors to bring prices down? Can you see any factors of this kind? Perhaps, the effects of import substitution could be strong enough to lower prices? Why are you counting on an abrupt decline from 7.5% to 4% by the end of 2024?
ELVIRA NABIULLINA:
Four percent inflation means that the pace of price growth will decline, that is, prices will not grow at the high rates of this year. The consumer price index will be
It may well be affected by one of the one-time factors you mentioned. However, we believe that sustainable inflation will be within
QUESTION from MySlo, Tula (online media):
Question on inflation expectations. You lay emphasis on household inflation expectations. My understanding is that a rise in the central bank rate is meant to lower household expectations, but the man in the street perceives your signal in the opposite way: as long as the rate goes up, prices are set to rise stronger and faster. That is, the man in the street thinks that now is the time to take out loans lest the loan rates are up again: I need to buy equipment, a car, a flat, and so on right away before everything has risen much further in price and before the ruble falls against the dollar again. What are your methods for tackling this disconnect, and what is your advice to citizens? What is the right thing for them to do?
ELVIRA NABIULLINA:
Indeed, we have just discussed this case: people are expecting a rate increase, and their inflation expectations are high, so they may be hurrying to take out loans. Indeed, rapidly rising inflation in the conditions of a slowly rising key rate is set to accelerate inflation expectations, and people will seek to take out loans on the expectation that the rate will go up even more. This explains our determined action when our rate increases are significant.
As you know, it took us essentially six months to bring inflation down to 7.5% from 16% and reduce the high inflation expectations of the time. That means, among other things, the growing appeal of deposits that is clearly seen. The inflow of household funds into deposits is ongoing, as is the reflow of cash to banks.
Furthermore, we can see that the credit channel is also starting to work, even with a lag, and like the other channels, we can see the response to it. That is what we believe will bring about a decline in inflation. Yet, the kind of primary effects you are talking about come with every rate-raising cycle. We are aware of this and take it into account, so our response must be well-timed.
QUESTION from Furydrops (weblog):
I would also like to ask you about inflation expectations. Inflation is above the target, and it has been very much above the target over the last three years. Clearly, we are seeing a ‘de-anchoring’ of the successfully anchored inflation expectations that you delivered between 2017 and 2020. Here is the question. It seems today that inflation expectations are increasingly adaptive. What is the Central Bank’s estimate as to how long it will take to create a new anchor for inflation expectations? Would you perhaps choose to revise the inflation target to make it more easily attainable, as well as the anchor, considering the next few years of potentially high fiscal spending, fiscal expansion, and labour shortages, as a result of current conditions? Would that be a more realistic approach and, accordingly, a more effective approach to lowering and anchoring expectations?
ELVIRA NABIULLINA:
We are very concerned over the fact that inflation expectations have been high for several consecutive years. I believe that the anchor in the form of low and predictable inflation should be the key anchor in our policy. Some advocate the use of the exchange rate for this role, but I will not explain right now why it is not a good anchor. This does not mean that we need to come up with a new anchor. We need to reduce inflation to target.
Our inflation expectations have always been adaptive. They track current inflation. In the relatively short period from the start of inflation targeting until 2021, we essentially failed to anchor inflation expectations at an appropriate point, although they came to be better anchored than before the start of the targeting regime. That is absolutely certain, and that is why it is imperative we return inflation and inflation expectations to what they should be.
As regards the attainability of the target, delivering on the target will have positive effects, including expanded planning and investment horizons, the emergence of long-term investment and investors who are confident that inflation will be low, since it has been held in check for a long period of time. Only then will there be long-term money and long-term loans. But it is very easy to kill this by changing the target subject to the circumstances. Changing the target is the worst way to provide the economy with long-term money. When we launched the Monetary Policy Review effort back in 2021, we though that the conditions to enable a target reduction had matured, since a reduction in the target goes with a rise in social welfare in every sense. That, however, is only possible after we succeed in stabilising inflation at about 4%, and then we should proceed to decrease the target, but increasing it is absolutely out of the question.
ALEXEY ZABOTKIN:
Changing the inflation target subject to the circumstances is tantamount to having no target.
It is like moving the goal in a football game. The essence of a policy aimed at price stability is that it delivers price stability no matter the conditions. Admittedly, there may be slight extensions of the timeline for inflation to return to target.
Last year, as you may remember, we said in the spring that the return of inflation to target would occur in 2024 rather than in 2023 as a result of very strong shocks caused by unprecedented changes in the external conditions. It is nonetheless unacceptable to extend the timeline for the target all the time. Therefore, we are aiming for
QUESTION from CGTN Russian:
Now that the financial year is almost over, which other targets does the Central Bank have for 2024? Are there still plans to boost dedollarisation, to work to promote the digital ruble, and, perhaps, to enable even faster settlements in national currencies with China, India, and Middle Eastern countries?
ELVIRA NABIULLINA:
Since we have multiple focus areas, let me only briefly outline a few of them.
The overarching goal is to return inflation to the target of close to 4%. Doubtless, we will continue our efforts to ensure financial stability, since sustaining financial stability is critical. Further, all development-related programmes will continue. You mention the digital ruble: that is one of the key projects. The pilot project is progressing, it is fairly successful, and the plan is to scale up beginning in 2024. There is a queue of those willing to take part in the expansion of the project.
As for settlements in national currencies, which you mentioned, it is very high on our agenda. Last year and this year, we have been working to enable our businesses to make foreign trade settlements in the face of restrictions. The effort is centred on the switch to settlements in national currencies. We see a rising share of such settlements (for both exports and imports). The share of so-called ‘toxic’ currencies is down.
While early in the year, they accounted for 50%, it is less than one quarter now. Imports are marked by the same trends. By the way, the share of the yuan in settlements is showing a dynamic expansion, as is the share of the ruble. Therefore, it is our standing task to enhance and support the international settlement system.
QUESTION from RIA Novosti:
The European Commission has unveiled potential long-term intentions to transfer profits from frozen Russian assets to Ukraine. Does the Central Bank plan to take action to use profits from frozen foreign assets in Russia? And when do you expect the claim to be filed to demand the return of the frozen Russian assets?
My second question is also about inflation in a way. We are approaching the end of the year, and let me also wish you well. Many Russians have by now received their annual bonus payments. Given that inflation is rather high, as you have said, what would you advise them to do? Would it be wise to invest the money, spend it, or make big-ticket purchases? Housing is not a profitable investment, as I understand.
ELVIRA NABIULLINA:
Regarding the seizure of profits from the frozen assets, in our opinion, both the seizure and the very freezing of the funds undermines the prospects of the euro as a reserve currency and a currency for international reserves and for international settlements.
Speaking of the claims on frozen assets, I have touched upon the matter on multiple occasions. We are making the relevant preparations, and despite some difficulties, the task is in the works.
As for annual bonuses and benefits and the to spend or invest problem, it is clear that many buy gifts for their relatives and friends in the run-up to the New Year Holidays. It is only natural to give your loved ones nice presents.
We usually choose not to give any specific advice, but let me draw your attention to deposit rates. They are quite attractive. They are in positive territory.
QUESTION from Karavan (newspaper, Tver):
The Bank of Russia has raised its key rate more than once this year, but prices have continued to grow regardless. It seems to many people that the high key rate is not working. Could you please explain to me why, and what is the effect of key rate increase? And, most importantly, what implications does it have on ordinary life?
ELVIRA NABIULLINA:
My response to you is that the key rate does work. It is already working. Had we failed to raise it, we would see much higher inflation and a weaker ruble.
Yet, the key effect of the several rate increases over this year is to be seen next year, since the rate — now and always — does not work immediately but with the passage of time. The chain of transmission is quite long.
I have said that our key rate influences deposit rates in the first place, together with banks’ loan rates, and then feeds through into the pace of loan growth and the savings rate, and thereafter through them it influences demand, ultimately translating into prices. The chain is quite long, and the total effect of key rate decisions usually takes from three to six quarters. That is not to say that the first two quarters are left unaffected: it works, but the fullest impact emerges in three to six quarters.
Now, how can citizens benefit from a rate increase? An increase works to reduce inflation and preserve the purchasing power of their incomes and protect their savings against the loss of value.
QUESTION from Forbes:
The Government is discussing a twofold reduction in the amount of subsidised mortgages in metropolitan areas, alongside an increase taking the downpayment to 30%. In the Bank of Russia’s view, will this help slow down mortgage lending, and why?
My second question, please. Might the collateral effect of the increase in the downpayment feed through into requirements for consumer loans so that borrowers are mandated to pay the initial contribution?
ELVIRA NABIULLINA:
We support the measures the Government is working on to change the terms of subsidised mortgages. In our view, this will bring a certain cooling of the mortgage market. Still, the core impact on the mortgage portfolio will come from the increase in the key rate. I have said that this effect is in place in the market for unsubsidised mortgages.
A certain impact is also being made by our macroprudential measures, which are in for further tightening from 1 January. The move has been announced.
The side effects you are talking about would apply to the case of borrowers without enough cash to pay the downpayment — those who will take out consumer loans to pay downpayments when downpayment requirements have tightened. We monitor this indicator. What we watch is when a borrower takes out a mortgage and whether the borrower has taken out a consumer loan in the previous 100 days. If I remember right, the share of such people was 4.8% a year ago and is 6.4% now. That is, the index is up but remains fairly small. We will monitor this indicator. As part of our supervisory processes, we will work with banks to ensure they make a proper assessment of downpayment sources and the risks.
QUESTION from Pravda Severa (online media, Arkhangelsk):
As you know, Western capital markets are closed to Russian companies. At the same time, the news came out recently that banking sector profits are expected to total more than three trillion rubles this year. That is quite a number. Here is my question. Does the Bank of Russia have the tools to help dedicate these funds to the development of the domestic economy?
ELVIRA NABIULLINA:
Banking profits are essentially a source of capital, especially when external markets are closed. They are the main source for banks to build up capital.
It is important for bank capital to grow, since growth enables banks to increase lending. The required ratios mandate that lending banks have appropriate capital. It is imperative that the rights of depositors and bank creditors be protected. We can see that lending is developing apace, and lending is the financing of the economy. Consumer lending is the financing of household demand for domestically made products. This demand is overheated.
Furthermore, corporate loans are growing. For 11 months of the year, the corporate loan portfolio totals 11 trillion rubles: that is 11 trillion rubles of funding for the economy.
Many banks are state-owned, and they pay dividends. All banks pay taxes and dividends. Our estimates show that banks are on course to contribute almost a trillion rubles to the budget this year. This could also be allocated for budget expenditures including social spending and economic support.
Even net of dividends, bank profits that can be invested in capital will be significant. We expect it to total between 1 and 1.5 trillion rubles. Next year, this will enable banks to continue to expand lending to the economy. We expect loans to grow but at a more balanced rate of
Now on to the allocation of resources for transformation projects. You know that we have adopted special regulation, and it has just begun to work. We intend to analyse how banks allocate funds for this sector.
On the subject of profits, let me mention that we should remember that the 2023 profits cannot be considered in isolation of the 2022 profits. At the time, banking sector profits plummeted, and the decline was almost certainly steeper than in any other sector. They fell tenfold. Meanwhile, non-financial sector profits remained flat or fell only slightly. Taken together, those two years saw lower banking sector profits than in the quiet 2021.
Importantly, non-financial sector profits remain high, which allows businesses to make investments and finance development, including from their own funds.
ALEXEY ZABOTKIN:
To feel the scale, there is talk of three trillion rubles worth of banking sector profits for this year. This year, the average monthly profit of the non-financial sector is more than three trillion, which means that every month, the non-financial sector generates more profit than the banking sector does in one year.
QUESTION from Vedomosti:
Tentatively, how many residents’ assets in type C and type I accounts may be blocked? Are there plans to offer Russian investors with assets in special accounts options to use them, such as buyout or swaps?
And another question: which additional measures have the Bank of Russia and the Government take, or which measures will they take, in accordance with the instruction of the President to support the public flotations of Russian companies? Are there any target IPOs for next year?
ELVIRA NABIULLINA:
Indeed, type C and type I accounts are showing a certain accumulation of funds. To the best of my knowledge, the amounts accumulated are undisclosed, but there are sufficient funds there.
With regard to the use of those funds, the recent order enables the exchange of blocked assets. That is the main option we are now considering. Also, type C accounts can be used to pay taxes, as far as I can remember.
As regards incentivising public flotations, that is indeed a very important area. It is clear from the financial market development programme that there is a whole pack of measures to incentivise such placements, including quantitative forecast indicators for such placements. Unfortunately, I do not know them from memory.
QUESTION from InvestFuture Project:
The oil market has been very volatile in recent months. Has the Russian economy grown more reliant on oil over the last two years? And what are the implications for the exchange rate and inflation?
The second question is about the current rate of unemployment, which is now a record low. Does the Central Bank believe that this unemployment rate makes it possible to achieve the 4% target? If not, what is the target unemployment rate that would help achieve this target?
ELVIRA NABIULLINA:
Speaking of oil dependency, it is probably better to talk about the oil and gas sector. The sector's share of GDP has declined on the back of lower oil and gas production and growth in other sectors. In that sense, we can say that our economy has become less dependent.
However, when we discuss the dependence of the economy, the budget, and the exchange rate on windfall revenue, oil price fluctuations, and overall demand for oil and gas, the fiscal rule undoubtedly stands out as one of the tools to reduce this dependency. It is the fiscal rule that has worked to protect our economy, the budget, and the exchange rate from excessive fluctuations.
The fiscal rule has been in place over the last two years, but it has not been applied in its final form. Therefore, what is important, we believe, is a gradual normalisation of fiscal policy, while the mandated fiscal rule should remain in place.
Now on to the unemployment question, that is, the unemployment rate which enables balanced economic growth without rapidly growing prices. There is a concept of a natural unemployment rate (or full employment). In theory, it is often relied on to calculate the level of unemployment that will allow the economy to grow at potential, that is, at a sustainably balanced pace, and keep inflation close to the target. Although it is an unobservable indicator, meaning that we cannot calculate it, the current level of unemployment (a judgemental estimate) is clearly below this level. This is seen in rising inflation and other data. Inflation is one of the indicators of overheating.
ALEXEY ZABOTKIN:
I will remind you of the methodology for calculating the unemployment rate. Unemployment is the number of people actively searching for employment divided by the number of those employed and those seeking employment. Accordingly, in a situation of high demand for labour and rapidly rising real wages (which is what the Governor has mentioned), the economy usually registers an increase in the labour force participation rate. Accordingly, the labour force — those actively looking for employment — includes people who have previously chosen not to be active employees.
In these conditions, we may see a certain increase in the unemployment rate, while the volume of employment does not fall but even grows precisely on the back of the inflow into the workforce of those who were previously economically inactive. Conceivably, this process is set to unfold in the near future.
QUESTION from Bitkogan Project:
We now understand that investor confidence is very important, especially after what happened to SPB Exchange and considering their silence. In this context, the question is: does the Bank of Russia intend to develop a framework to mandate interaction between financial institutions and the media so that people are aware of their plans and next steps?
ELVIRA NABIULLINA:
It is outside our remit to mandate that financial institutions interact with the media, but in general I agree with your stance on the matter. Confidence is impossible without dialogue in the first place. Even if it is difficult to solve a problem, there should be dialogue and there should be information. I think the exchange is now sharing the information they have.
PHILIPP GABUNIA:
Perhaps we need to clarify which information is missing. I know there were some questions to the exchange regarding the places of storage for particular investors, in the case such disclosure is required.
In this case, the exchange should indeed interact and disclose ownership chains to specific investors. The stock exchange might struggle to publicly disclose all information to an absolutely unlimited circle of people in certain cases, for the need to take action to unlock the blocked assets, and this is a sensitive point.
In general, however, the exchange must interact. And as far as I know, they are now making contact with investors. There will always be some dissatisfaction and there will be things that are missing. In this case, we are also ready to interact with the exchange to deal with this situation and others.
ELVIRA NABIULLINA:
Interaction with exchanges is essential here. However, the way to address this is probably not by introducing statutory requirements and standards but by encouraging our infrastructure to maintain dialogue with investors.
QUESTION from Financial One (magazine):
When the rate went beyond 10%, many expected that it would not be for long, similar to what happened in previous crisis periods, so banks were unwilling to offer any long-term deposits. Is there reason to believe that market players are increasingly accepting that the current high rate is here to stay, that is, they are no longer expecting a forthcoming downward revision?
The second question is of a more philosophical nature. What would you say are the top five risks for the Russian and global economies next year and over a two-to-three-year horizon?
ELVIRA NABIULLINA:
You are indeed right on the point of the expectations of market participants. When we first implemented a significant rate rise back in August, there were expectations for a repeat of the events in both 2015 and 2022, when we were able to quickly start reducing the rate. At the time, we sought to explain in detail that a repeat was unlikely considering that, last time, we had lifted the rate primarily to fight financial stability risks. Once those risks were gone, we quickly switched to rate reductions.
This time, we have been raising the rate to combat inflation. I believe that our action has driven an adjustment in market expectations. Now, we cannot see any strong gaps with our expectations, that is, we cannot say that the markets expect a reduction in the key rate too soon. Naturally, there are questions regarding the path of decline. It will in large part depend on the data.
As for risks, there are internal and external risks. Of external risks, sanctions risks are still present. The risk of a global economic slowdown would affect our economy. Although our oil and gas dependency has declined, it still exists, and it is meaningful. Next, there are the risks of global economic fragmentation. These risks come from the external conditions.
Certainly, there are internal risks linked to sustainable inflation decelerating more slowly. We are ready to make every effort to address that.
There are risks associated with the pace of structural transformation, as long as we would all like this transformation to succeed and deliver efficiencies including higher labour productivity and investment efficiency, which we have also mentioned today.
I want to look at these risks from the angle of our goal, searching for the remedy to counter them, and ultimately to take advantage of these risks.
Other risks include labour shortages, of which we have had a detailed discussion, so our decisions need to factor them in. That is all, probably. I am not sure if there are five of them.
QUESTION from Reuters:
Do you think analysts are quite accurate in their predictions that the Central Bank will continue to sell rather than buy foreign currency next year?
One more question, if I may. The Central Bank has always advocated fair competition, but a number of companies have the privilege of choosing the information they publish. What is your attitude towards this?
ELVIRA NABIULLINA:
As regards our foreign market operations moving forward, we have communicated how we intend to ‘mirror’ budget operations, and much will depend on oil prices. If the price of oil is what it is now, we will probably sell currency. This would shore up the ruble, all other things being equal.
On the second question, it is true that a number of companies have individual permissions not to disclose certain information. This is due to the sensitivity of this information to sanctions risks, and the strategic nature of such information. Nevertheless, our principled stance is unchanged, since the public equity market is known to be an information market. And the investor confidence we have just talked about is impossible without issuers disclosing securities information. It is the same with IPOs: appropriate disclosures are critical.
We believe that having a security on the quotation list is often a signal of quality for investors. Therefore, quotation list securities have always been covered by higher requirements.
That is why companies have to choose which information to disclose or not disclose, and, accordingly, to be on the quotation lists or not to be, if they are not ready to disclose. In our opinion, we should not give false signals to investors.
And now we are working on conceptual approaches to how the volume of undisclosed information is aligned to the listing level of the securities on the exchange. I hope we formulate a balanced approach here.
QUESTION from Frank Media:
Small banks with access to SWIFT are increasingly sanctioned. What is your view of the prospects of such players after they are covered by the restrictions? Do you have any forecasts for a decline in the number of banks in the country?
Furthermore, at the last press conference, you said that the Central Bank and other financial authorities would seek to float of the companies that have changed ownership from foreign to Russian. However, the final documents say that this extends only to public joint stock companies, that is, not all are going public. And another point: the discount on the selling price at which these companies were sold was only offered to large businesses, not to retail investors. Why did the financial authorities adopt such a strategy?
Another question is about SPB Exchange. We can see that the friendly infrastructure did not work after the platform was sanctioned. Is it correct to understand that this is not a panacea?
And one more point. According to the Central Bank’s financial risks review, there may be an overhang of securities to be transferred from foreign to Russian infrastructure, and restrictions are possible on transactions with them. Can you give us an estimate as to when these restrictions are coming and what may they be like?
ELVIRA NABIULLINA:
Many questions. Let me give you brief answers. First, all the Russian banks covered by the sanctions are operating. They are adapting their business models to the new market conditions and are showing profits. There is no reason to believe that any newly sanctioned banks will turn in a totally different performance. I am certain that they will adapt their business models and continue to operate.
As for shares in the companies acquired by Russian investors from outgoing foreign owners to be floated, this indeed applies to public joint stock companies. It is critical for us to make sure the level of openness and transparency of companies as they change ownership does not go down.
For private joint stock companies — certain assets are being bought in this way — it really takes a long time and changes in corporate practices. Public companies must meet certain requirements.
We will work to incentivise companies regardless of their switch of ownership, from foreign to Russian shareholders — any companies — to go public, to enter the capital market. We have discussed this on a number of occasions.
As for the St. Petersburg Exchange, indeed, after it was put on the sanctions lists, the exchange had to stop trading in foreign securities, having suspended trading in the securities held at friendly depositories. Let me say right away that this is within the law.
Although friendly states did not impose sanctions, their depositaries and settlement institutions stopped transactions out of fear of secondary sanctions and the need for additional compliance procedures. These compliance procedures are ongoing. It is my understanding that once they are complete, the exchange will present the operating procedure that will apply in these conditions and communicate it to investors.
Now, on to the overhang. We do not have a problem with the overhang. There are no plans to introduce restrictions.
PHILIPP GABUNIA:
At this moment, there are no plans for trade restrictions if we are talking about quasi-Russian securities, which are redomiciled in the Russian Federation.
ELVIRA NABIULLINA:
Thank you.