Bank of Russia Deputy Governor Alexey Zabotkin’s speech on draft Monetary Policy Guidelines for 2025–2027

Good afternoon,

Today, we have published the first draft of the Monetary Policy Guidelines. This is a policy paper outlining our annual strategy for three years ahead.

The goals and principles of monetary policy remain unchanged.

The key function of the Bank of Russia pursuant to the Constitution is to protect the ruble and ensure its stability. Under the central bank law, this is delivered ‘by maintaining price stability’, i.e. low and stable inflation. The law also establishes that the policy of maintaining price stability is an enabler of a balanced and sustainably growing economy.

The Bank of Russia seeks to maintain inflation close to 4% and return it to the stated target if it deviates. With monetary policy instruments having a gradual effect on the economy, their full impact is only apparent several quarters after relevant decisions are made.

Our key tools to influence inflation are the key rate and communication about future monetary policy with explanations of the rationale behind our decisions. The level of the key rate drives loan and deposit rates as well as the exchange rate of the ruble. As it changes the key rate and gives a signal about its future path, the Bank of Russia influences economic decisions of households and businesses. They decide whether to take out loans, make big-ticket purchases and invest — or if it is better to save at the moment. These decisions determine how fast domestic demand — consumer, investment and public demand — for goods and services grows. Inflation is low if and only if demand is commensurate with current production capacities and the pace of supply growth. This is the balance that monetary policy seeks to ensure.

The impact of the policy rate on the economy — what economists term the ‘monetary policy transmission mechanism’ — remains in place under any circumstances. However, its parameters, i.e. the speed and scale of impact of our decisions on lending and thereby on demand may change. In recent years, such changes have been driven first by the pandemic and then by sanctions. The transmission mechanism was notably affected by a significant expansion in subsidised lending. Our key rate decisions factor in these changes, among others. Details of the transmission mechanism are traditionally presented in Appendix 1 of the Guidelines.

With our decisions affecting the economy with significant lags, a holistic analysis of the current situation and a macroeconomic forecast are equally important for monetary policy. The Bank of Russia’s medium-term forecast is updated four times a year. It is supported with a modelling framework, which is detailed in a section of the Bank of Russia website. This week, we have posted another update to the technical description of one of the key models our forecast relies on — the quarterly projection model.

Further, let me stress that an integral part of inflation targeting is a floating exchange rate. It enables the economy to adjust to a changing external environment, and the Bank of Russia to conduct independent monetary policy — independent from other countries. In the Guidelines, the benefits of a floating exchange rate are summarised in a separate box.

We realise the importance of public confidence in the Bank of Russia’s actions. This allows our inflation policies to make a difference. To this end, we seek to promptly and openly present all possible information about our policy. This year, we have a separate appendix in the Guidelines to outline the evolution of Bank of Russia communication policy in 2024. In what has become the key innovation, a Summary of Key Rate Discussion has been published since February. Furthermore, we have held more meetings with businesses and the academic community in the regions. We rely on social networks and our Telegram channel for active dialogue with people.

Now on to the economic situation and the forecast scenarios.

The situation analysis was presented in the materials following July’s key rate meeting. I will therefore confine myself to some key characteristics of the overall picture, which defines pre-conditions for all the forecast scenarios.

The Russian economy grew at a high pace in the first half, faster than the baseline forecast assumptions of last year's Monetary Policy Guidelines. Strong domestic demand is the key driver of economic growth. It is supported by growing incomes and an expansion in lending, including due to high public sector demand and large-scale subsidised loans. However, the capability to further expand the supply of goods and services is increasingly held back by a shortage of physical resources.

First, these are significantly exacerbated labour shortages. To retain staff, let alone hire new employees, companies across many industries are raising wages at a record pace. This drives up the incomes of those employed in these industries. However, as labour productivity grows slower than wages, this simultaneously increases the cost of the goods and services that consumers want to spend their additional income on. Second, materials and components are rising in price; their output also fails to keep pace with demand. Third, production capacities are becoming increasingly depleted, especially in manufacturing, transport and logistics. The pace of capacity expansion is limited on the one hand by sanctions and on the other by the physical constraints to boosting the output of means of production. After all, this boost is impossible without additional labour. In this area, we have seen exactly the same (if not more acute) labour shortages as in consumer goods sectors.

The rising inflation, estimated to sit again well above the 4% target as of the end of 2024, comes exactly in response to demand significantly having outrun production capacities. In this setting, the Bank of Russia believes that monetary policy should be more tight, and the extent of tightness be sustained for longer than we expected one year ago. This is the only way for the real, physical, capabilities of the economy and its potential to match the outrunning nominal demand. Unless this balance is restored in time, not only will inflation stay high, which is intolerable in itself, but it will also steadily accelerate given an overheated economy.

The key rate is the main and efficient tool to influence inflation. However, we have to take into account the greater share of the economy that is less sensitive to monetary policy, meaning that a more drastic change in the key rate is needed to come to the same result (low inflation) than when that share was smaller.

Let me now briefly outline the scenarios in the Guidelines.

Economic developments depend on a number of internal and external conditions. The Guidelines, in addition to the baseline forecast, which is updated quarterly, always present alternative scenarios.

Our Baseline Scenario has been published following the key rate meeting of the Board in July. To save time, I am not giving another account of all its details. Just as a reminder of its assumptions, GDP growth in 2025 is estimated to decelerate to 0.5–1.5%. This is linked to more moderately growing demand next year. For lagging production capacities to catch up with the outrunning demand, tight monetary policy throughout 2025 will have to be maintained.

Under the forecast, the key rate averages 14–16% in 2025. Once the economy has stopped to overheat and demand equals production capacities, inflation returns to target in 2025 and stays close to 4% moving forward. By 2027, real GDP grows again at its long-term potential rate, which is balanced and sustainable.

The Baseline Scenario is the likeliest but not predetermined. Things might change if domestic or external conditions become different. In this year’s Guidelines, there are three alternative scenarios.

Of them, the Disinflationary and Proinflationary scenarios provide for different domestic conditions. As before, the third, Risk, scenario illustrates the possible effects of a large-scale and strong shock originating from the global economy and commodity markets.

Under the Disinflationary Scenario, potential GDP growth in 2025–2026 is higher than in the Baseline Scenario. This in fact means that the effects of rapidly growing investments and the efforts to optimise production that domestic companies and entrepreneurs have been making over the past two to three years will have a more significant impact on potential growth. If this is the case, a higher level of demand does no harm to the economy. Inflation also returns to target in 2025, but on the back of a lower degree of monetary policy tightness than the Baseline Scenario assumes.

Growth rates in 2025–2026 are higher than in the Baseline Scenario at 2.0–3.0% a year. It is of importance to note, however, that faster growth in this scenario is not driven by softer monetary policy but by investment having a stronger effect on potential output.

Here comes a natural question: How can we find out that this scenario has materialised? The data will tell us. This scenario assumes that GDP grows faster than in the baseline scenario, and inflation and inflation expectations slow faster. This exactly means that the potential output is catching up with demand more quickly and, accordingly, the overheating is receding faster than in the Baseline Scenario.

The other two alternative scenarios are less favourable than the baseline one.

The Proinflationary Scenario assumes that domestic demand, all other things being equal, stays higher than in the Baseline Scenario. Why is that possible? This scenario focuses on additional autonomous domestic demand, such that is insensitive to monetary conditions, in particular the level of interest rates in the economy. This autonomous demand, or rather its underestimated scale, is one of the key factors behind the acceleration of inflation over the past 12 months.

The likely source of such autonomous demand is the above-mentioned subsidised lending programmes among others. They boost aggregate demand, reduce the reach of market lending, and lead to higher rates on market loans — so that overall growth of lending in the economy and the demand it creates match the available production capacities. The Proinflationary Scenario provides for an expansion in subsidised funding in 2025 relative to Baseline Scenario assumptions. However, we will see very similar effects even if that additional amount of autonomous demand materialises for other reasons. This is why subsidised lending is just one of the mechanisms we use to illustrate the case of high autonomous demand.

What is this scenario about? Inflation ultimately returns to target, but it takes one year longer. This scenario also requires a tighter monetary policy, considering that the scale of overheating and the inertia of inflation expectations are aggravated relative to the Baseline Scenario. Moreover, this elevated autonomous demand entails a further rise in the neutral rate in the long run. As you can see from the tables of forecast indicators, this scenario assumes a neutral rate of 8.5–9.5%, that is one percentage point higher than the Baseline Scenario.

Admittedly, GDP growth gains a little from the additional demand in 2025, only to experience a more significant slowdown, to near-zero growth, in 2026. As a result, GDP as of the end of the forecast period is the same as in the Baseline Scenario. However, inflation and the tightness of monetary policy over 2025–2027 is higher than in the Baseline Scenario.

We believe that the Proinflationary Scenario is more probable than the Disinflationary one. Yet, both are much less likely than the Baseline Scenario — this is always the case with alternative scenarios.

Finally, Risk Scenario assumptions are close to those for last year. They give an illustrative account of the fallout from a global financial crisis that is comparable in scale to the 2007–2008 crisis. With major economies in recession, global demand declines, and commodity prices drop significantly. To set off the shortfall in oil and gas revenues, the National Wealth Fund has to be mobilised extensively. This very tough scenario assumes that the liquid part of the National Wealth Fund, already considerably down in 2022–2024, is exhausted by late 2025 or early 2026.

As the long-term equilibrium of global oil prices settles at a lower level, it entails a change in fiscal rule parameters. A reduction in the non-oil and gas deficit will be needed to maintain long-term fiscal stability as global oil prices hold steadily lower. The assumptions factor this in.

This scenario provides for Russia’s annual GDP to decline within two years between 2025 and 2026, although in quarterly terms the economy touches the bottom between late 2025 and early 2026. A full-fledged recovery of 2.0–3.0% will not emerge before 2027, and a return to well-balanced growth will not occur beyond the forecast period. To head off spiralling inflation triggered by severely aggravated terms of trade, a significant tightening of monetary policy will be required in 2025 and a tighter policy in 2026 than assumed in the Baseline Scenario. In such developments, inflation does not return to target before 2027.

The Risk Scenario is the least likely of all those considered and, apparently, less probable than the same Risk Scenario we modelled in last year’s Guidelines.

Fiscal policy remains extremely important for the economy in all the scenarios. A responsible and well-balanced fiscal policy supported by a fiscal rule ensures the predictability of monetary policy over a medium- and long-term horizon, and is crucial to sustainable macroeconomic stability and steady economic development. Even if the budget deficit averts expansion, proinflationary effects may well come from a changed structure of budget expenditure and revenue. Following up on my comments regarding the Proinflationary Scenario, the standing facilities of subsidised funding inevitably distort monetary conditions and reduce the reach of market lending, all other things being equal. Their impact on demand and inflation is determined not by the amount of fiscal spending needed to subsidise interest rates, but by the growth of lending these programmes bring about. Given the significant lags in monetary policy transmission, the predictability of both key fiscal policy parameters and of the scale of subsidised lending programmes is critical to delivering on the inflation target.

The five years since 2020 have been a time of extraordinary and rapid changes in conditions. Unfortunately, over the past four years, inflation has been persistently above our 4% target.

The Monetary Policy Guidelines present the rationale for our actions alongside the methodology, discussed in the boxes and appendices and an illustrative analysis of scenarios. All these materials are intended to demonstrate that a responsible monetary policy is able to restore price stability under any scenario of events. It takes more time in the case of impactful extraordinary events, shocks and structural shifts, than in more standard, purely cyclical economic developments.

A well-balanced and proportionate monetary policy does not hamper sustainable long-term growth. It however enables society to hedge against a situation when the pursuit of rapid growth today leads to households, businesses and the state confronting high and even stubbornly accelerating inflation in subsequent years.

It is sustainably low inflation that ensures affordable long-term financing and a long planning horizon for businesses, preserving the purchasing power of household incomes and savings as well as trust in our national currency. This is exactly the focus of our monetary policy.