Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 7 June 2024

Good evening,

Today, we have made the decision to keep the key rate at 16% per annum.

In recent months, we have been observing a pause in the deceleration of current inflation and steadily high economic growth rates. Nevertheless, the data available do not allow us to make any unambiguous conclusion about further development of the Russian economy. Our baseline scenario, which is the most probable one, still assumes that overheating of the economy will start decreasing in 2024 Q2. However, the scenario that would require an additional key rate increase for disinflation to gain new momentum has become more likely. The choice between these two scenarios will be the key point of our core meeting in July. 

I would now dwell on the reasons behind our today’s decision.

Firstly, as regards inflation.

The key rate increase in 2023 H2 helped notably slow down price growth. However, in April—May, we received data signalling that disinflation might have paused. Current price growth rates returned to 6% in annualised terms in April and remained elevated in May, high-frequency data show. One of the factors impacting the price dynamics during these two months was a one-off indexation of prices for domestic cars and communications services. Nevertheless, the measures of underlying inflation were growing in April as well. Moreover, after the four months of a decline, households’ inflation expectations rose again in May. Analysts and financial market participants also raised their forecasts.

All these factors are intensifying the risks that the measures of underlying inflation might be declining not as quickly as assumed in the baseline scenario and might get entrenched at the current level or even accelerate. In this case, we would need to additionally raise the key rate. This alternative scenario will remain a subject for discussion in the course of our July meeting when we obtain comprehensive data on price dynamics in May and June and more information about economic and lending activity.

Secondly, the economy.

We have received very strong data on economic activity and the labour market. Over 2024 Q1, GDP was up by 5.4% year-on-year, and the annual growth of nominal wages exceeded 20% in March. These figures might be evidence of a faster rise in demand. However, we should remember that GDP growth might be slightly overestimated because of the leap-year effect. As to wages, the surge might be associated with the payment of large annual bonuses for the financial year that was very successful for many sectors. In other words, although economic activity remains high, it might actually be somewhat lower than these figures.

As before, we consider that the output gap remains significantly positive. Overheating in the economy in 2024 Q1 has not decreased at the very least. In the first place, this is evident from elevated price growth rates, especially in unregulated sectors. One of them is tourism, which was the subject of a separate box in the May issue of our Regional Economy report. Over the last year, the tourist traffic increased by a record 17%. During the May holidays this year, the southern regions, Saint Petersburg and Kaliningrad welcomed considerably more tourists compared to last year. High demand is promoting the development of the regional economy. However, its increase should be balanced throughout the country, and supply should adjust accordingly — this is an essential factor. Otherwise, high demand would translate into price growth. Russian regions need time to expand tourism clusters, specifically to commission new hotel buildings, find suppliers and especially labour resources. Growing tightness in the labour market, in particular historically low unemployment, is yet another strong evidence of substantial overheating in the economy.

As the official economic statistics are released with a time lag, we pay special attention to high-frequency data that our regional branches obtain directly from businesses. Some of them note signs of slower growth in demand and economic activity, in particular, lower producer prices and a reduction in output in mining and quarrying, metallurgy, and construction. In a number of regions, companies expect demand to be more moderate in the next three months. This is in line with our baseline scenario where the economy starts to grow at a more balanced pace already this quarter. 

Thirdly, monetary conditions have somewhat tightened.

The market of federal government bonds has recorded a rather significant rise in yields for all maturities. Growth in interest rates in the money market and yields on federal government bonds for maturities of up to one year has been associated with expectations that monetary conditions would remain tight for longer. Increasingly fewer market participants expect the key rate to be cut soon. Another evidence of the tightening of monetary conditions has been soaring real yields in the segment of inflation-linked bonds amid a moderate increase in breakeven inflation. This tightening will be translated into other market rates.

Despite this, lending to both businesses and households has continued to surge. More moderate dynamics are only observed in unsubsidised mortgage lending so far. This trend in mortgage lending will be solidifying after the non-targeted subsidised programme is terminated in July. In the baseline scenario, we expect that our earlier monetary policy decisions and a long period of tight monetary conditions will help ensure more balanced growth rates in all lending segments.

Households’ saving activity remained high. In 2024 Q1, the saving ratio hit a ten-year maximum of this period. As before, high deposit rates have encouraged households to deposit funds with banks. Furthermore, competition between banks for depositors has increased after the limit for fee-free money transfers between an individual’s accounts was raised to ₽30 million. This encouraged banks to raise deposit rates to retain their clients. For the disinflation trend to solidify in the coming months, households should save a significant share of rising wages and the expansion of lending should decelerate. This assumes that the saving ratio should remain high or even rise somewhat further.

Now, I would like to speak of external conditions.

Overall, our view of global economic prospects has remained largely unchanged and is consistent with the baseline forecast. As global growth rates stay high, the demand for Russian exports will remain stable. 

The situation with exports and the inflow of foreign currency earnings into the domestic market has been steady in recent months. The OPEC+ decision to extend the oil production quotas is paving the way for oil price stabilisation over a one-year horizon. The monetary policy pursued makes ruble assets more attractive and ensures more balanced growth rates in imports. However, the import dynamics in recent months might have been affected by payment problems caused by the sanctions. If the difficulties persist for a long time, limited import quantities might have a proinflationary effect in the medium term.

I would now dwell on the risks to the forecast.

Our baseline scenario assumes that, in 2024 Q2, growth rates will be more balanced and disinflation will accelerate. However, risks to this scenario have risen.

The first risk is that economic growth rates might continue to notably deviate from a balanced growth path. The second risk is that labour shortages will not be easing. So far, there are no signals that the labour market tightness is weakening. The third risk is rising inflation expectations. Finally, geopolitical risks remain quite strong.

In such situation, the alternative scenario is becoming more likely. It assumes that the supply of goods and services steadily lags behind demand and inflation begins to speed up again or gets entrenched at the current level for a long time. To be able to give a substantive assessment of the probability of this scenario, we need additional data on lending, economic activity, the labour market and inflation that we are to receive by July. Today, we do not have decisive arguments to reject the baseline scenario in favour of the alternative one. Nonetheless, I would like to reiterate that the likelihood of the latter has risen.

I would briefly talk of the budget. In May, the Government announced the parameters of the tax reform. They provide for an increase in profit tax, the introduction of more progressive scale of personal income tax and a number of other novelties. To make monetary policy decisions, we need to have a comprehensive insight into the situation, including budget expenditures. As the increase in expenditures will be fully funded from rising revenues, the overall influence on inflation will be neutral. However, there might be secondary effects related to the structure of these expenditures and revenues, and these effects might be both proinflationary and disinflationary.

Furthermore, with regard to fiscal policy, we will take into account the volume and duration of subsidised lending programmes. The larger is the volume of subsidised loans, the higher are interest rates needed for all borrowers to prevent high price growth. This applies not only to mortgages, but to the volume of subsidized loans in general, which are not really sensitive to the key rate changes. The larger is the volume of subsidized lending programmes, the higher will be the key rate.

Winding up, I would like to comment on monetary policy prospects.

The Bank of Russia remains determined to return inflation to the target of 4%. If persistent inflationary pressures do not ease and proinflationary risks materialise, we hold open the prospect of considerably increasing the key rate in July. Monetary conditions will remain tight for as long as needed to bring inflation back to the target.

Thank you for your attention.