Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 16 February 2024
Good afternoon,
Today, we have made the decision to keep the key rate at 16.0% per annum.
Last year, we could observe a surge in inflation. This implies that the economy was growing at a pace above its potential. In other words, overheated demand was significantly exceeding capacities to ramp up output. We responded to this by raising the key rate to 16% per annum. Today, we can clearly see how efficient the monetary policy transmission has been. Monetary conditions have become tight, promoting savings and gradually cooling down the demand for loans. As a result, price growth has started to decelerate. Nevertheless, there is still uncertainty about the future pace of these disinflation processes. Therefore, to ensure a sustained return of inflation to the target, we will need to maintain tight monetary conditions for an extended period. Our policy will help decrease inflation to
I would now dwell on the reasons behind our today’s decision.
Firstly, as regards inflation.
Current price growth rates were at the peaks last autumn. Inflation trends have weakened primarily owing to the monetary policy tightening. It has had a disinflationary effect through the interest rate, exchange rate and expectations channels. The key rate increase has pushed up credit and deposit rates, which has decelerated the expansion in lending and boosted growth in deposits. As to the exchange rate channel, the high key rate has made ruble assets more attractive, moderating the demand for imports and, accordingly, foreign currency. This has helped stabilise the ruble exchange rate. The pass-through of the ruble weakening that occurred in summer to prices has completed. Finally, financial market participants, households and businesses have started to decrease their estimates of future inflation from extremely high levels.
In December and January, we observed a slowdown in seasonally adjusted monthly price growth compared to the rates recorded in autumn. Moreover, this was largely due to components reflecting sustained price movements. Core inflation edged down. In January, price growth generally remained nearly the same as in December. The only exception was prices for housing and utility services that were rising faster in January. The growth in this segment was largely associated with more expensive health resort services and trips. Apparently, seasonal growth in prices for domestic tourism could strengthen because the Russians have refocused on domestic travel.
Thus, the decline in sustained price movements is already obvious. These disinflation processes might be uneven, but, according to our baseline scenario, they will bring inflation back to
Secondly, the economy.
Last year, GDP reached 3.6%, which is much higher than was forecast. The main driver was domestic demand. Investment increased most significantly, which is attributed to the structural transformation of the economy. Flash data show that investment activity continues to grow, although more slowly. A major contributor to the economic growth was consumer demand supported by rising wages and lending. Consumption had been soaring until the end of last year. We have not yet received comprehensive data for the beginning of 2024, but our regional branches could see signs of a slower rise in consumer activity in January. Regional differences in consumption and business activity, lending and inflation are analysed in detail in the Regional Economy report.
The strong growth of GDP might also mean a more substantial recovery in economic potential. The need to transition to domestic production has been promoting investment demand and the launch of new production capacities. Last year, the country was actively developing transport and logistics infrastructure. There are examples of import substitution for domestic production in the consumer goods, food, furniture and household chemical manufacturing industries.
Nevertheless, the expansion of the economic potential is always a slow-moving process, while aggregate demand in the economy supported by government expenditures and quickly growing lending has risen much more notably. Consequently, even despite the improved production capacities, the significant surplus of demand, that is, overheating in the economy, had been translating into soaring prices. Apparently, the peak of that overheating was in autumn. As a result of our key rate decisions, the economy has started to gradually return to a more balanced growth path.
We can make such a conclusion because inflationary pressure has been slightly weakening during the past two months, and the labour market has not been tightening further. The demand for companies’ products has been growing somewhat more slowly than before. Our monitoring shows that such estimates are common to most industries. Estimates of demand growth in industries manufacturing investment goods remain high. As regards businesses’ expectations for demand, they stay close to record highs, except in mining and quarrying. Furthermore, labour shortages encourage companies to invest in labour automation and labour productivity growth.
This year, the economy will be growing at a more moderate pace. However, compared to our October forecast, we have raised the estimate of GDP growth to
Thirdly, monetary conditions have been tightening further.
The yield curve of federal government bonds has become more negatively sloped, that is, long-term interest rates are lower than short-term ones. Short-term yields remain high, which is associated with market participants’ expectations about the duration of the period of high interest rates. Contrastingly, long-term yields have declined, which is the evidence that financial market participants’ inflation expectations have lowered.
Both credit and deposit rates have been growing further. The expansion of consumer lending has decelerated notably amid rising interest rates and tighter macroprudential requirements. The amounts of new mortgages (seasonally adjusted) have been declining recently. The decrease is faster in the market segment, where the monetary policy transmission is not distorted. Subsidised mortgage lending saw lower issuance compared with the autumn peaks, which is due to the changes in the parameters of the subsidised programmes.Nonetheless, the issuance rate remains high, at the level of early 2023. The expansion of the corporate loan portfolio has slowed down compared to mid-2023. Corporate lending will continue to grow, although more moderately than last year.
At the end of 2023, the saving ratio increased. Saving activity has stayed high in early 2024 as well. Owing to a considerable rise in incomes, households are able to both consume and save more. Nevertheless, higher interest rates, especially amid lower inflation expectations, will be increasing the propensity to save.
Now, I would like to speak of external conditions.
The situation in the world economy is generally better than expected. However, as the main driver of economic growth is the service sector which is less resource-intensive, this does not result in a considerable expansion of the demand for commodity exports.
At the end of last year, exports contracted in terms of both prices and quantities. One of the factors was additional difficulties in foreign trade transactions related to settlements and logistics. In the second quarter, the oil market might shift to a surplus. Non-OPEC+ states are going to actively expand oil production, which might put additional pressure on prices.
Considering these trends, we have revised our forecast for foreign trade, decreasing the estimate of exports for this year, whereas the forecast for imports has changed only slightly. As a result, the trade surplus will be smaller than last year and below the level expected in our October forecast.
Proinflationary risks are still significant.
In the first place, these risks are related to external conditions, including secondary sanctions and deterioration of the situation in commodity markets. Second, there are risks associated with inflation expectations. High and unanchored inflation expectations are more sensitive to short-term rises in prices for certain products and services. This might entail secondary effects on inflation. Third, the response of lending to tight monetary conditions might be weaker if the government maintains extensive subsidised programmes. Finally, in a persistently tight labour market, labour productivity might be growing more slowly than wages, which involves risks as well.
I would also like to mention disinflationary risks. The increase in demand might be slowing down more quickly than expected in our baseline forecast. Besides, if the growth of the economy was driven, to a greater extent, by the expansion of its potential rather than the cyclical component, inflationary pressure might be weaker.
Winding up, I would like to comment on monetary policy prospects.
We have raised the forecast of the annual average key rate by one percentage point. The average key rate will equal
The discussion that preceded the vote on our today’s decision will be detailed in our new publication — Summary of the Key Rate Discussion. It will be released on 27 February.
Thank you for your attention.
Q&A for the Media
QUESTION from TASS Agency:
As usual, the first question is about the options you considered at today’s meeting. How broad was the consensus? You’ve said that if you see room for a key rate reduction, you will be decreasing it smoothly. Does this mean that we should not expect any easing in the first half of the year?
ELVIRA NABIULLINA:
We discussed two alternatives: to keep the key rate unchanged or to raise it. We will provide the rationales behind these two options in the Summary of the Key Rate Discussion to be released in a week. Nevertheless, we reached the consensus to keep the key rate unchanged.
Indeed, we do see room for a key rate decrease. However, we should proceed with key rate cuts gradually and smoothly. By the way, a reduction in the nominal interest rate, the key rate might also imply that monetary conditions will remain tight if inflation expectations trend downwards. We need to monitor the real interest rate.
We discussed with the colleagues when we can start to cut the key rate. The opinions varied greatly. Nonetheless, the majority believe that the reduction will rather begin in the second half of the year.
QUESTION from Interfax:
Can the signal regarding the future stance of monetary policy be considered neutral? Why have you removed the precise wording about the signal from the press release? Is this a permanent change? And question two, please. Are you still waiting that the situation with inflation will reverse and annual inflation will peak in the spring—summer of the year? What are the factors underlying your decision to increase the forecast of the average key rate for
ELVIRA NABIULLINA:
The signal may be considered generally neutral. You could have noticed that we have also changed our press release because of the innovations in the format of our publications. In my opinion, they make it clear that the signal is neutral overall. In the first place, we believe that the economy passed the peak of current inflation, that is, seasonally adjusted monthly inflation, in autumn 2023.
As regards annual inflation, which is price growth over the past 12 months, the peak might indeed occur this spring. Besides, annual inflation might speed up only slightly compared to its current rate, namely by no more than a few tenths of a percentage point. The indexation of utility tariffs is expected in early July, which might also accelerate annual inflation for a while. Nevertheless, we generally believe that, as a result of our monetary policy, the underlying components of inflation will also continue to decrease and annual inflation will slow down to
Mr Zabotkin, would you please answer the question about the updated key rate forecast.
ALEXEY ZABOTKIN:
Actually, the key rate forecast for 2024 and 2025 was raised because, following today’s discussion, both the Board of Directors and other experts participating in the preparation of the decision apparently consider now that key rate cuts should begin slightly later compared to the timing predicted after the October meeting. Accordingly, as key rate decreases will start later, the average key rate will be higher this year. Since the key rate will be slightly higher at the beginning of the next year as well, its average level in 2025 will also be higher. This is because we need to assess the steadiness and pace of a reduction in inflationary pressure more accurately.
As to the wording about the signal, we have indeed removed the standard lengthy description of the underlying factors. We rely exactly on the same rationales that we used to provide in our press releases of the previous format, but we have decided that, by the moment, everyone knows them sufficiently well. If we have a signal about a particular policy stance, we will use wordings similar to those in the past. There will be nothing new in this regard.
QUESTION from Lipetskaya Gazeta (Lipetsk):
The Central Bank admits that the key rate might be cut in 2024. In this connection, I would like to ask you about the option you consider the best one in the current situation. Is this a progressive step-by-step reduction or a single substantial decrease similar to last year’s rise in the key rate?
ELVIRA NABIULLINA:
Considering the current situation when inflation is slowing down gradually after the surge in demand rather than decelerating quickly like in 2014 or 2022 after the spikes in prices, for instance, we believe that the key rate decrease will apparently be progressive and smoother. Of course, the percentages of the cuts will depend on incoming data about the pace of a slowdown in inflation, inflation expectations, and inflation risks. Speaking of the considerable rise in the key rate in August 2023, it was associated with the need to mitigate the risks of stronger inflationary pressure. In view of the economic patterns, consumers’ and companies’ behaviour and inflation usually trend upwards much faster than they then reverse. Therefore, the Central Bank that shall ensure price stability normally raises the key rate more quickly in order to mitigate all these risks, compared to the pace of its subsequent reduction.
QUESTION from the Bitkogan project:
As you’ve mentioned several times already, the Bank of Russia increased the key rate forecast for 2024. How will this influence the domestic economy? Should we expect a recession?
ELVIRA NABIULLINA:
Interest rates need to be raised promptly in order to prevent risks of a recession and a persistent acceleration of inflation provoked by the mismatch between soaring demand and an insufficient expansion of the output of products and services as, in such a case, we would need to bring inflation down through a much more significant and long-lasting increase in interest rates that might entail a recession. Our baseline forecast does not assume a recession.
ALEXEY ZABOTKIN:
I would like to emphasise that the forecast of GDP growth for this year has been raised by
QUESTION from the portal JustMedia.ru (Yekaterinburg):
Subsidised mortgage lending was a driver of the mortgage market in 2023 and the key rate is considered to be the reason behind the increase in the cost of the subsidised programme. How important was this factor when you were making the key rate decision? Does the Bank of Russia rather believe that the ‘bubble’ in the mortgage market will be shrinking gradually as a result of the macroprudential measures?
ELVIRA NABIULLINA:
Subsidised lending programmes in general, and not only in the mortgage segment, create such segments in the credit market that are less or not responsive to the key rate. What does this actually mean? Considering that, through the key rate, the Central Bank influences aggregate demand and credit activity in general, it has to change monetary conditions, market-based interest rates in the credit market more notably, that is, to alter its key rate more significantly. We take this into account when making our key rate decisions.
You are certainly right saying that we are facing a financial stability problem. The Central Bank’s objective is to maintain financial stability. What does this imply? This means that we should limit the amount of high-risk and, therefore, potentially bad debts in certain segments of the financial system. We are addressing this task exactly through the macroprudential measures as they are aimed at limiting the accumulation of such risks. Additionally, they help prevent an excessive surge in prices for these assets, for housing in this case.
In our opinion, risks in the mortgage market have risen, but this situation should not be considered a ‘bubble’ in the mortgage market. This is what we have been talking about. We could observe signs of overheating when elevated demand for mortgages, primarily driven by subsidised programmes, was pushing up prices rather than improving the affordability of housing for people. We can also see that, for instance, subsidised mortgages accounted for 60% of the disbursements last year. Therefore, the macroprudential measures applied and directly the decisions of the Government to change the parameters of the subsidised programmes will certainly be cooling down this segment of the market. Nevertheless, we can also observe that the response of market-based mortgage lending to our key rate decision is adequate, absolutely normal.
QUESTION from RIA Novosti:
Already a month ago, the Central Bank announced that it was against the extension of the requirement obliging exporters to sell foreign currency earnings. However, considering that the ruble has been weakening recently, aren’t you going to revise your position regarding this issue?
ELVIRA NABIULLINA:
As we have already said, the Bank of Russia does not see a solid rationale for extending the requirement to sell foreign currency earnings. In our opinion, its role in stabilising the exchange rate is much weaker compared to other measures, other effects. The main effects have been achieved through the monetary policy tightening, the changes in the key rate that we raised twofold within a rather short period, as you remember. This is the key rate increase that has made savings in rubles rather than in foreign currency more attractive, as well as moderated the rise in the demand for imports. Furthermore, the exchange rate in 2023 Q4 when it was strengthening and stabilising was also influenced by the balance of trade and the increase in Russian exporters’ earnings. In August—September, prices for Russian exports were growing and, considering the time lags in transportation and payments, the market was receiving foreign currency earnings in the second half of the autumn. Of course, we are analysing these data. However, we believe that these are fundamental factors that promote the stabilisation of the exchange rate in the first place.
QUESTION from Krasny Sever (Vologda):
The regulator refers to imbalances between domestic demand and supply as a factor accelerating inflation. Moreover, high interest rates are decreasing business activity and, consequently, slowing down the expansion of the output of goods, which in turn is adversely affecting supply in the market. Don’t you think that tight monetary policy currently pursued by the Bank of Russia contradicts the objective of lowering inflation?
ELVIRA NABIULLINA:
No, there is no contradiction here. The key rate is really influencing consumption, demand, and investment. This is true. However, demand is much more responsive to the key rate compared to the supply of goods and services. Accordingly, the effect of the monetary policy tightening is definitely disinflationary. Those countries that were trying to deny the truth, and we do know such examples, have fast inflation and expensive loans.
By the way, investment is much more strongly influenced by inflation expectations rather than the current level of the key rate as they are taken into account in long-term credit rates. Furthermore, you might have noticed that long-term interest rates had started to grow already from autumn 2022, that is, three quarters before we began to raise the key rate. In other words, market participants had been taking into account higher inflation expectations when setting long-term interest rates. That was associated exactly with rising inflation expectations. Today, we can observe that medium- and long-term interest rates are, to the contrary, lower than the key rate. This means that market participants expect that inflation will be decelerating as a result of tight monetary policy, which is making these long-term rates increasingly attractive.
I would like to stress that we are recording growth in the proportion of corporate loans raised at floating interest rates, including to finance investment projects. What is important for investment projects is not today’s interest rate, not the current level of the key rate, but rather the level of the key rate (where floating interest rates are linked to the key rate) and of the floating interest rate that will be effective on average in the course of the implementation of a particular investment project. The stronger the confidence that monetary policy is adequately tight and the current level of interest rates is sufficient to bring inflation back to the target, the stronger the confidence that credit rates will be going down. What we can observe today is rising demand for loans at floating interest rates that take into account a potential reduction in the key rate following the stabilisation of prices.
Furthermore, I would like to stress that the major constraint today, which we have been constantly talking about, is staff shortages rather than the affordability of loans. This is proven by our business surveys. This is equally true for the manufacture of consumer, investment and intermediate goods. If lower credit rates drive the demand for equipment higher, while it is impossible to ramp up its output due to staff shortages or insufficient production capacities, this equipment would simply become more expensive. All this would be pushing up prices instead of boosting the actual output of goods and services.
Besides, I would like to stress another aspect regarding investment and output. Firstly, the expansion of the output of goods and services is not slowing down, which is evident from its growth rates and our forecasts for the future. Nevertheless, companies’ equity, their revenues have always been and will remain the major source for financing investment. Loans are only issued when businesses have returns on equity. Indeed, there are over-indebted enterprises. However, these are generally inefficient and loss-making businesses whose equity is not growing or is squeezing because of losses and they are thus forced to increase leverage.
The sources for financing investment from revenues are significant in Russia. Excluding the banking sector, Russian companies’ revenues, or overall financial performance exceeded ₽34 trillion as of the end of the previous year (although we currently have data only until November). This is approximately ₽3 trillion monthly, which is a record high — 16% more than in 2021, for example. Currently, there are no signs of any decline in this amount. Hence, the economy has the resource for investment, for financing projects. We believe that investment activity will be supported by these revenues in the conditions of tight monetary policy as well.
QUESTION from Financial One:
My question is as follows. As regards the pass-through of the key rate in the economy, it has already occurred, and we can see its result in both credit and deposit rates. There are bond offerings as well. In other words, previously, there were fears that the economy would stall in the conditions of such a high key rate, or, maybe not the economy in general, but the financial system that would not be able to function with this level of the key rate. We can see that everything is operating perfectly well, that is, the credit system is working and companies are issuing bonds, which means that the economy is on track. Therefore, the question is about the perception of the key rate, that is, whether the level of 16% is high. Should we consider today’s key rate high or is it rather just a certain interest rate existing in the economy that, generally, should not be perceived as high?
I’ve got a related question. As to the loans issued at interest rates that take into account the key rate of 16%, can you see any risks that there might be problems with servicing such debts or do you think that there are no particular risks and borrowers will generally be able to service these debts quite well?
ELVIRA NABIULLINA:
You are right, the key rate is translating into the economy, and we have always been talking about this, but the pass-through has not completed yet, that is, the key rate has time-lagged effects on the economy. The pass-through will continue. As to whether the key rate can be perceived as high and monetary policy as tight, indeed it is tight because the key rate helps rein in inflation. It is slowing the expansion in lending to balanced growth rates. Last year, lending was increasing very fast, at a record-high rate in many segments. Therefore, monetary policy is tight, but it does not prevent anybody from raising loans. In other words, our forecast of growth in lending to the economy, including both businesses and households, remains positive. The growth rates will certainly be lower compared to last year’s record highs, but loans will remain affordable. Lending will just be expanding at a pace that will not be pushing prices higher.
As regards your question about whether companies might face any problems with servicing their debts due to the high key rate, we are closely monitoring this situation to make sure that there is no threat of financial stability risks. This is really critical. There are no such risks, which is also evident from the statistics on loan restructuring applications. When interest rates surged during certain periods in the past, the number of loan restructuring requests soared as well. Currently, we do not observe such a trend. We can see that many companies (not households) are raising loans at floating interest rates, that is, they believe that they are now able to service a loan at a sufficiently high interest rate and expect it to go down further on during the term of the loan.
ALEXEY ZABOTKIN:
A threat to borrowers’ financial stability is generally associated with loans that were raised at low interest rates during a period of very accommodative monetary policy. Later on, interest rates went up and those companies who failed to repay their loans for any reason, may be forced to refinance them. In such a case, they would refinance these loans at the interest rates that are actually unmanageable for the economy of a business that was taken into account in the course of the implementation of these projects as it was estimated based on the assumption that interest rates would remain low for the entire period. Loans at high interest rates are issued by banks after a very cautious assessment of the quality of borrowers. The latter also prefer to be confident that they do have a safety cushion. Hence, the problem is due to other factors.
ELVIRA NABIULLINA:
Another reason is as follows. Our communication with banks shows that they are still issuing enough loans, including corporate ones, since they see that companies do have cash flows. Their revenues are sufficiently high, which creates a safety cushion for borrowers. In other words, the economy continues to earn money, and this supports lending growth rates as well.
QUESTION from Reuters:
We are happy to see that you are fine despite some rumours that you are not feeling quite well, which is generally no wonder considering the high level of responsibility. Thus, the Governor of Turkey’s Central Bank failed to cope with rising pressure. Could you give any comment on this news?
My second question is about the deficit of yuan liquidity with banks. Do you observe this shortage and how are you going to address this issue?
Another question, please. Western countries are discussing the confiscation of Russia’s gold and foreign currency reserves or the returns on them. What are the measures Russia may take in response?
ELVIRA NABIULLINA:
I would prefer not to comment on the first question.
As to the deficit of yuan, there is no such problem in our opinion. Indeed, there are periods of volatility in the yuan market, volatility in the demand for yuan liquidity. This was especially evident before the New Year holidays in China. We could also observe such volatility with respect to US dollars and euros. However, we have all necessary instruments, FX swaps to address such issues. We also have such an instrument for yuan and it is efficient. Hence, we do not see any problems in this regard.
Answering your third question about the reserves, their potential confiscation, I should say that, in our opinion, this would be a strong negative signal to other central banks as well, since such a step would essentially undermine the fundamentals of the security of central bank reserves. A key principle, a basic principle of international law is the immunity of central bank assets from seizure. This immunity ensures the stability of the system of international finance. In our opinion, any deviation from this principle will be disrupting, though gradually, the system of international finance and the role of reserve currencies around the globe. In our turn, we will be taking measures in order to protect our legitimate interests.
QUESTION from the Law and Invest project:
What is your opinion regarding the impact of budgetary expenditures on inflation? According to the data from the portal Electronic Budget, expenditures have increased again in February. At the beginning of last year, the Ministry of Finance was also actively financing budgetary expenditures in advance. What is the correlation between the spike in inflation in the middle of last year and the expenditures at the beginning of this year and can such a situation repeat in 2024? What is the Bank of Russia’s view concerning this situation?
ELVIRA NABIULLINA:
The situation with the budget, budgetary expenditures and the budget deficit is one of the factors that we take into account when making our decisions as budgetary spending, or to be more exact, the budget deficit affects aggregate demand. We rely on the already approved and announced decisions.
As regards a certain spike during a particular month, this might happen. Indeed, such a rise can occur. However, when we calibrate our policy, the dynamics of expenditures over the course of the year are certainly more important. Nevertheless, we do factor in that there might be such temporary fluctuations. Therefore, we have been always saying that uniformity of budget spending is a rather significant factor.
Last year’s spike in inflation was largely provoked by the combination of both accommodative monetary policy and expansionary fiscal policy.
ALEXEY ZABOTKIN:
Inflation is affected not so much by budgetary expenditures as by the structural deficit of, broadly speaking, the consolidated rather than the federal budget, as well as the budget operations to invest the National Wealth Fund’s resources and so on that are not included in the deficit calculation but are influencing the public sector’s demand. Therefore, distribution of expenditures throughout the year is of secondary importance in terms of their effect on the dynamics of aggregate demand: if the deficit does not change during the year in general, that is, the overall configuration of fiscal policy remains the same in the medium term, accordingly, the dynamics of aggregate demand will be the same as assumed in the forecast and in the course of making key rate decisions.
QUESTION from TV channel NTV:
You’ve kept the key rate unchanged for the first time since July. Does this mean that the situation with inflation has at least stabilised, if not improved? And question two, please. Mass media reported this week that the Central Bank might establish limits on instalment purchases. What is the approximate amount of such a limit? Mass media wrote about ₽60,000—80,000. If this is true, don’t you think that this amount is too small considering current prices for devices?
ELVIRA NABIULLINA:
As regards our decision to keep the key rate unchanged, we do see that the situation has improved. Indeed, we can say that the situation with inflation is better now as inflation has started to go down. Moreover, this is not only about volatile components (as one-off factors, including the weakening of the exchange rate, have exhausted their effects that were provoking the surge in inflation), but also underlying components. Of course, we’ve factored in this trend.
Speaking of instalments, this issue is currently under discussion. I would like to reiterate that such instalments shall be regulated when they actually may be considered to be lending with interest accrued on instalments. However, we are still discussing the amount of such a limit.
Instalments should be accessible to people. Indeed, this can be convenient when consumers purchase durables, devices, and so on. Why are we trying to regulate instalments? We consider it critical to protect people’s rights. When consumers make instalment purchases and retailers charge high interest on these amounts, whereas people are frequently unaware of such interest rates and there are no ways for protection, their legitimate interests are violated. In this case, we believe that people should have the option of an instalment purchase, but they should not be exposed to serious risks that they may be facing when, for example, they raise loans at high interest rates. We stipulate the requirement to inform consumers, the limits on increases in fines and penalties, and so on. As to instalments, there are no such requirements. Therefore, it is essential to introduce such regulation, but we will continue to discuss the exact amounts and other aspects. I would like to stress once again that such an option should remain accessible, but we need to ensure that instalments will not entail any problems for consumers.
QUESTION from Argumenty i Fakty:
My questions are about expectations and employment. The Bank of Russia began to raise the key rate already three quarters ago. However, as you’ve noted, inflation expectations stay high and unanchored. Simply said, people are constantly concerned about a likely new surge in prices. Could you please comment on the reasons for such a situation? Is this about psychological perception or, possibly, uncertainty regarding the ruble exchange rate? Do you see any other reasons?
And question two, please. You have repeatedly noted that real wages in Russia are growing faster than labour productivity. What industries are exposed to these risks the most? Is the Central Bank’s goal to reduce inflation compatible with the record-low unemployment rate in the country?
ELVIRA NABIULLINA:
You are right saying that inflation expectations stay elevated, although they are obviously decreasing. However, they remain elevated and, which is even more important, unanchored, that is, any event might again provoke a rise in inflation expectations. We are closely monitoring this issue. This is an essential factor we take into account when discussing and making our decisions.
In our opinion, inflation expectations are now higher than they should be considering the current inflation rate, let alone the level where they should be with inflation at 4%.
Nevertheless, we can see that inflation expectations are going down. Moreover, surveys do not show that people are expecting a new spike in prices. Inflation expectations for a year ahead are lower than people’s estimates of current inflation. This is what we see from the surveys. Nevertheless, since inflation expectations remain elevated and might even rise further even due to transitory and volatile factors affecting inflation, there is a risk that inflation might get entrenched at a high level. This is also an essential factor explaining why we need to maintain tight monetary conditions to ensure the return of inflation expectations to more adequate levels, which would in turn contribute to a steady deceleration of inflation.
Indeed, the exchange rate is one of the factors influencing inflation expectations. The dynamics of the exchange rate have a very strong impact on people’s expectations. However, I would like to emphasise that our monetary policy has a stabilising effect on the exchange rate as well. Hence, we also ensure this indirect effect, that is, by stabilising the exchange rate, we are reducing the risk of its impact on inflation expectations.
As regards wages and labour productivity, you are totally right about this. By the way, we are analysing and discussing these issues with our colleagues in the Government so as to understand how labour productivity is changing across industries since we can see that, today, investments are actually made in projects aiming to improve labour productivity and automate business processes. Many companies are doing this, and this trend is very important. However, it is essential to ensure that growth in labour productivity is consistent with increases in wages. The risks of a gap between the dynamics of wages and labour productivity are higher in industries facing more acute staff shortages for obvious reasons. In the first place, these are manufacturing, freight transportation, construction, and trade.
Today, the unemployment rate has really dropped to a record low. To be consistent with the inflation target, the labour market should have such a structure where employers would be able to hire required specialists offering them wages that would be proportionate to the growth of labour productivity. I am explaining this in such a way because it is impossible to measure the employment rate that would ensure this — this is rather a qualitative estimate.
If labour productivity grows more slowly than effective demand, this will be increasing inflation rather than actual consumption.
QUESTION from the business portal Avant-Partner (Kemerovo):
Is the Central Bank monitoring how the regions’ economies are responding to the rise in the key rate? If yes, how strongly is the response changing following the key rate increase?
ELVIRA NABIULLINA:
Of course, we are monitoring the overall situation in the regions’ economies, including how it is changing under the influence of our key rate decisions.
I should note that the Russian regions generally respond to the key rate increase in a similar way demonstrating the same trends: the demand for consumer loans is declining, households’ propensity to save is rising, and consumer activity is also growing but at a more moderate pace, which helps decelerate inflation.
However, the scale and pace of the response certainly vary across the regions as each of them is influenced by a whole range of different factors. You are from Kemerovo that is definitely affected by the situation in the global coal market and the carrying capacities for coal shipments to Eastern ports. These factors may affect the economic situation in general.
Thus, a key issue in the North-West that we have been discussing for two years is how quickly production facilities in this region that used to focus on exports to European countries will be transformed and adapted to new markets, new supply chains, and new logistics. Such regional dynamics enable us to interpret the statistics adequately and make more balanced monetary policy decisions that factor in the economic situation in general. Therefore, the heads of our regional main branches have been participating in key rate discussions for many years already. Besides, we inform you of the situation in the regions in our Regional Economy report published before the quiet week — it is prepared jointly by all our regional branches.
QUESTION from RBC:
Businesses of various sizes are complaining about increasingly frequent problems with payments in foreign trade with Turkey and China. Some businessmen suggest establishing a centre for payments and settlements with the engagement of the Government and the Bank of Russia as a way to address this problem. What is the Bank of Russia’s opinion regarding this initiative and possible ways to tackle the problem with settlements in foreign trade?
ELVIRA NABIULLINA:
Indeed, the situation with foreign trade settlements has been worsening recently, which is evident from Russian companies’ data. What are the implications? These difficulties encourage us to explore increasingly more payment alternatives. We are actively negotiating with businesses and studying options to address these issues.
As to the centre for payments with the direct involvement of the Government and the Central Bank, I do not think that it could help significantly reduce the barriers in settlements. Nevertheless, we are openly discussing different options with our colleagues. There are various forms of possible solutions, including digital financial assets. We hope that the relevant law (the draft was prepared long ago) will be approved and settlements in central bank digital currencies will be developing.
Nonetheless, the main way to deal with this issue is certainly settlements in national currencies. However, settlements in national currencies is not the only solution, although their proportion has grown, as you can see. Another way is to use independent infrastructures for financial messaging and, accordingly, develop the network of correspondent relations. Yet, there are specific aspects, peculiarities for each country, and we are exploring all of them.
QUESTION from Russia 24 TV channel:
At the forum in Yekaterinburg, you suggested introducing a cooling-off period when large loans of more than ₽1 million are issued. When such a requirement could technically become effective and how long could this cooling-off period last? Will this affect credit activity?
ELVIRA NABIULLINA:
Indeed, we believe it critical to implement prompt anti-fraud solutions in lending, and a cooling-off period could be one of such measures.
Currently, we are discussing a two-day cooling-off period for large loans with banks, similar to the one for money transfers. We are open for suggestions. Sometimes, people wish to receive a loan immediately, and they should have such an option. As to large loans, we consider it essential to introduce a cooling-off period. Currently, we are discussing this with banks. I hope that the relevant draft law will be prepared and maybe, in an ideal scenario, even approved this year. In this case, there is no time to waste and these decisions should be made as soon as possible.
As regards credit activity, I do not think that this law will have any impact. Banks will just be required to pay more attention to anti-fraud procedures. The latter are already effective in relation to money transfers, but have not reduced their amounts. Such a law will enhance the protection of people raising loans. I do not think that this will have any effect on lending amounts.
QUESTION from Forbes:
My question is about the fees that a number of large banks charge from developers for their access to subsidised mortgage lending programmes. Earlier, the Bank of Russia reported that it was communicating with banks regarding the use of such a practice. Is there any progress in this discussion to harmonise the positions of the Central Bank and credit institutions? If banks refuse to adjust their current approaches, what enforcement measures could the Bank of Russia apply? Does the regulator consider them necessary?
ELVIRA NABIULLINA:
Indeed, we are communicating with banks on this issue, and they are providing their reasoning, explaining why they are acting this way and why this practice is not as bad as it is viewed by the Bank of Russia. We are exploring both their estimates and rationales. I should say that some large banks (although not many of them) that used to charge such fees have cancelled them.
In our opinion, the main problem in this case is certainly unfair competition. Therefore, this is the Federal Antimonopoly Service (FAS) that has the main instruments to address this problem, and we have provided our reasoning to the FAS. By the way, we can also see the other side of competition. There is an increase in lending by those banks that do not charge these fees from developers, as reported by DOM.RF. Furthermore, we have applied to it in order to raise the limits on subsidised mortgages primarily for those banks that do not apply such fees. Thus, those banks that do not charge such fees would be in a more beneficial position.
What can we do on our part? One of the negative consequences of these fees is that housing prices will be higher than the market value, which means that these fees will be included in housing prices. Therefore, within our supervisory powers, we will be communicating with banks to ensure that mortgaged housing is valued appropriately, according to market prices. We will take this into account when applying various ratios and add-ons.
QUESTION from the project Slozhny Protsent:
Currently, the key rate notably exceeds not only the official inflation rate, but also inflation observed by households. Does the Central Bank consider the difference in these three indicators totally normal? Obviously, this should not function this way. What would be the ideal ratio between these three indicators, in your opinion? What should be done for this ideal scenario to become the reality? This is my first question.
And question two, please. Is the Board of Directors considering the option of accumulating foreign assets in any forms, other than yuan and gold? Are you exploring the opportunity of investment in non-reserve assets of friendly countries? How much are you concerned about the decrease in the diversification of the currency structure of assets, especially considering that the yuan is unstable and there are some doubts about the prospects of a further expansion of China’s economy?
ELVIRA NABIULLINA:
Speaking of the difference between the key rate, official inflation and the inflation rate observed by households, there is no simple formula or ideal ratio. We believe that the key rate should be at a level that would help bring inflation back to the target in the case of its deviation. If inflation is at the target, the key rate will actually be at a neutral level that we assess as
As regards the difference between official and observed inflation, there is such a difference almost always and everywhere. However, the lower inflation is and the longer it stays at a low level, the closer the inflation rate observed and expected by households is to the inflation rate that is based on statistics. By the way, there were such periods when observed inflation was close to the official rate during the time when inflation was steadier and low.
ALEXEY ZABOTKIN:
Whether in a situation when inflation is below the target and monetary policy should be accommodative and, accordingly, we should reduce the key rate or in a situation when the economy is overheated, inflation is high and we have to raise the key rate, for the key rate to influence the economy, its response to the deviation of inflation cannot be identical. Otherwise, the real rate will not change and monetary conditions will not become tighter in the case of a key rate rise and will not ease when we reduce the key rate. Its response should be increased by a certain factor.
As a result, the difference between the key rate and inflation expands during periods of tight monetary policy and decreases when monetary policy is accommodative, among other things. Generally, this correlation is true for all central banks that pursue their monetary policy within the framework of this mechanism.
ELVIRA NABIULLINA:
As to the reserves, the Central Bank needs them for interventions when there are risks to financial stability. When the Bank of Russia conducts foreign exchange interventions, they should be in the currency that is demanded among market participants.
The demand depends on the currencies of their foreign trade settlements and borrowings and on the currencies of market participants’ and households’ deposits.
Thus, we can see that the proportion of the yuan has now notably increased in settlements, borrowings and deposits. Accordingly, the composition of our gold and foreign currency reserves is currently in line with today’s trends.
Of course, we are now not considering the issue of investment in non-reserve currencies as this would imply a reduction in the reserves.
Furthermore, as regards other currencies, in addition to the fact that they should be demanded among businesses and households, it is also necessary to assess the liquidity and volatility of particular markets. The currencies of countries facing high inflation depreciate and, consequently, they are generally not considered attractive for investing gold and foreign currency reserves.
Hence, we believe that the current composition of the reserves is in line with the tasks to be addressed by the Central Bank and the economy.
QUESTION from Mosckovsky Komsomolets:
My question is as follows. Recently, social networks, Telegram channels and people in general have formed the opinion that, until the presidential election, the exchange rate will stay approximately at the same level as today, that is, about
And question two, please. Is the Bank of Russia planning to introduce or cancel any foreign exchange restrictions after 18 March and, if yes, what are they? What will be the exchange rate of the ruble against the US dollar, euro and yuan after 18 March, according to the regulator’s forecast? Does the Central Bank have any expectations for the spring, considering that yuan-denominated deposits have been growing and households have accumulated yuan holdings.
ELVIRA NABIULLINA:
I would like to remind you that we have a floating exchange rate and that the Bank of Russia does not give any exchange rate forecasts, but I would like to emphasise that the exchange rate of the ruble, the current exchange rate forms under the influence of fundamental factors. There are no special, artificial or secret artificial factors impacting the exchange rate. The effect is ensured primarily by monetary policy and the state of the balance of trade. These two basic factors are influencing the exchange rate. These are the objective factors that should be monitored.
Possibly, the opinion that the exchange rate is now artificial has formed because of a rather popular belief that the requirement to sell foreign currency earnings has been the determinant of the appreciation of the ruble and, further on, after the cancellation of this requirement, the ruble will start weakening. According to our analysis, the major factors that have influenced the ruble exchange rate are the improved balance of trade and the tightening of our monetary policy. These are the factors that have helped strengthen the exchange rate.
Even if we analyse the amount of foreign currency earnings sold subject to this requirement, the proportion of the sales was high, specifically 94% in November and 98% in December. These figures are higher than in the summer months. However, this was a seasonal increase as exporters normally sell their earnings at the end of the year, including to make dividend payouts. Net of the sales exceeding the required percentage, the amounts of sold foreign currency earnings were at the level of
The ruble was strengthening simultaneously with the increase in the key rate producing the related effect and the rebound in oil prices observed in August—September. Foreign currency earnings are credited with a lag of
QUESTION from Bloomberg:
What is your assessment of the value of non-residents’ frozen assets, funds, securities in
ELVIRA NABIULLINA:
Speaking of
Speaking of the exchange, as you know, we have proposed a number of mechanisms and are open for discussion. Yet, this is only possible on a bilateral and voluntary basis.
QUESTION from the project Invest Future:
I have two questions. The first one is about the requirement obliging exporters to sell foreign currency earnings. If these measures remain in effect, might they have any negative implications?
My second question is related to type 3 individual investment accounts (IIAs). By the moment, brokers have already started to actively open accounts to their clients, whereas the draft law on amendments to the Tax Code has not been approved yet and, most probably, will only be approved in spring. Should people, investors wait until these amendments are introduced?
ELVIRA NABIULLINA:
As regards the requirement to sell foreign currency earnings, as I have already said, it has had a very limited effect on the exchange rate, in our opinion. The determinants have been the fundamental factors. However, in our view, this requirement to sell foreign currency earnings certainly involves extra costs for companies and additional difficulties with payments for imports, including for purchased equipment, because businesses have to convert the funds back into foreign currency and make the payments already from the Russian infrastructure, which is associated with the so-called enhanced compliance and payment delays, let alone the administrative burden related to the need to fulfil the requirement to sell foreign currency earnings. This is why we do see that this measure entails such costs.
Speaking of type 3 IIAs, indeed, people may open them already now and there are plans to introduce tax benefits, a tax deduction. This law is currently under consideration, but has not been adopted yet. We hope that it will soon be approved and are working on this issue together with our colleagues in the Government. We expect that this tax deduction will apply to IIAs opened from 1 January 2024. However, this decision has not been approved yet — this is the remit of the legislative authorities. Therefore, we have recommended that brokers opening type 3 IIAs should notify their clients that such a tax deduction is possible but the relevant law has not been adopted yet, so that people can be totally aware of the current situation.
QUESTION from Kommersant:
One more question to continue the topic of foreign currency earnings. Is it possible to say that, last autumn, almost at the end of the year, this requirement and its fulfilment by exporters actually resulted in excessive strengthening of the ruble and, roughly, there was a slight increase in imports compared to the scenario without such a requirement in place?
My second question is related to the activities of the People’s Bank of China (PBC). The PBC and China’s authorities in general are intensifying their policy amid the slowdown in the domestic economy. What channels of influence are you analysing if you consider this necessary?
ELVIRA NABIULLINA:
As to the effect of the requirement to sell foreign currency earnings on the ruble strengthening, its contribution has been minor, in our opinion. As I’ve already said, we believe that this factor has had a weak effect on the exchange rate dynamics. The determinants in this case are the balance of trade and our monetary policy that have helped strengthen the ruble. This is because imports have become more costly and exports have ensured additional earnings because of the improved situation. These are the fundamentals.
Speaking of China and the role of the yuan in settlements, as I have already noted, the proportion of the Chinese currency in settlements, financial transactions and deposits has surged. Of course, this is increasing the role of the yuan for the Russian economy. Furthermore, in addition to a larger share of the yuan in settlements and financial transactions, China’s proportion in our foreign trade, including both exports and imports, has also expanded.
As the economic ties have deepened, trends in China’s economy and the exchange rate of its currency against other global currencies are now influencing the Russian economy more significantly than, for example, before 2022. However, in our opinion, this effect is produced mostly through trade channels, rather than financial flows. This is because there are certain restrictions in both the Russian and Chinese financial markets, while the latter is primarily influenced by the PBC’s decisions and has capital controls in place. Therefore, compared to the influence that was previously exerted through US dollars, euros, the US Fed’s and ECB’s policies, this effect is much weaker.
Nevertheless, to the extent that the PBC’s decisions are influencing China’s economic activity in general, in particular the actions that will be associated with the demand for Russian exports, of course, there is such an effect on both purchasing power and the exchange rate, as we are certainly analysing all these factors when making our decisions.
QUESTION from the blog Anna_finance:
The State Duma is preparing the draft law that would limit the use of floating interest rates in consumer lending for the second reading. This draft law also requires banks to notify borrowers in advance in the case of interest rate changes. However, banks disagree with the restrictions on floating rates as this might involve losses for them. My question is as follows. What is the Bank of Russia’s opinion about the reasonableness of using floating interest rates for certain types of consumer loans and about commercial banks’ disagreement with the introduction of possible bans on floating rates in consumer lending?
ELVIRA NABIULLINA:
In this case, the Central Bank’s initiative to limit the use of floating interest rates in consumer lending is aimed at protecting the rights of banks’ customers. Possibly, banks do not always support our initiatives associated with the protection of their customers.
It is worth noting that floating rates are not widely used in retail lending now. They are mostly set for legal entities that have qualified specialists able to assess interest rate risks, that is, risks of changes in interest rates. Ordinary people can hardly assess all potential consequences of changes in a floating rate. A retail borrower might raise a loan at a currently low interest rate assuming that it will stay at this level for a long time and sign the loan agreement and, if the interest rate grows, will have to repay the loan at a high rate under the signed agreement.
We are meticulously analysing international experience. Where countries allow floating interest rates for households, they establish limits on possible changes in these rates, that is, they limit a potential rise in floating rates. Therefore, we suggest limiting possible increases in interest rates, for example, to no more than a third or no more than four percentage points, so that such a rise could be affordable to people considering their financial standing.
By the way, many banks used to start offering floating rates (we do remember these discussions) anticipating an increase in interest rates, seeking to issue loans at low rates to households to then transfer the interest rate risk to them. This is why we believe it critical to introduce such regulation, that may rather be preventive to a certain extent, in order to avoid the development of such a practice. Of course, people should be notified in advance, but the five days suggested by banks is quite a short period — possibly, it should be longer.
Maybe the option of floating interest rates should be accessible to affluent customers, very wealthy customers who have high incomes if they are ready to accept the interest rate risk. We need to analyse whether floating rates may be permitted in this case. As to the majority of people, the restrictions are needed, in my opinion.
QUESTION from TV channel CGTN:
You’ve already spoken a lot about the frozen assets today and all the questions that we initially wanted to ask have already been answered. Nonetheless, could you please answer whether you have received any strong signal, so to say, from the regulators of other countries with regard to the EU’s plans about the Russian assets?
This issue is not new — it has been discussed for nearly six months already or even longer. Do you observe any specific measures taken by the regulators in other countries due to the fact that the Western financial system has obviously disrupted confidence in itself to a certain extent?
ELVIRA NABIULLINA:
Surely, we have not received any strong signals from the countries seeking to freeze our assets. However, we are receiving signals from the states with which we maintain trade and financial relations. We can see that they are becoming increasingly interested in diversifying their assets, establishing alternative systems for settlements, and so on. I think this is a totally natural reaction to such risks of confiscation of the reserves.
I firmly believe that many countries will start to diversify their reserves. Although the process will be gradual because the proportion and role of the US dollar in the world economy are great, but this will definitely happen.
Thank you for attention.