Elvira Nabiullina’s speech at State Duma’s plenary session
Good afternoon, fellow colleagues, and Mr Volodin.
First of all, let me thank you deputies for the time and effort that went into preparation of the Monetary Policy Guidelines for submission. In preparing for this meeting, my deputies and I met with all factions and answered at least a hundred written questions. The discussions that both the working group and the joint meeting of the three committees held involved Deputy Ministers of Finance and of Economic Development. Today, the ministers themselves have joined us for this meeting. This was dictated by the need for a more systematic picture, and I can only welcome this approach by the State Duma. There is a strong alignment between the Bank of Russia and the Government. Monetary policy should be considered in conjunction with the Government’s efforts aimed at economic development, including the development of a supply-side economy.
What can characterise all the discussions in the factions? All of them were able to capture public mood. On the one hand, there are mounting concerns that the high key rate brings harm to the economy and undermines its growth momentum seen over the past two years. On the other hand, and it is clear from our dialogue with deputies, concerns are rising over stubborn inflation. This is due to overall price growth as well as rising prices for the most socially sensitive goods. Consumer prices, the rising costs of doing business, and administered prices are all links in a chain, and are the direct effects of high inflation.
Monetary policy discussions can be tantamount to the dilemma of what comes first: economic development or the fight against inflation. My deep conviction is that there is no such dilemma, and we are not confronted with this difficult choice.
Our policy aims to contain price growth. Price control is essential for sustainable economic growth.
Inflation has been stubbornly high for a fourth consecutive year. Over the course of these four years, consumer and business expectations for inflation have been marked by strong inertia. This necessitates our resolve in preventing this affliction from becoming chronic.
An assessment of monetary policy involves an understanding of all the details of the current economic picture.
On the one hand, the rapid growth in demand, supported by both credit and fiscal stimulus, has led to equally rapid economic growth. Since 2022, the critical industries focused on domestic demand, and above all mechanical engineering, have gained a very strong boost.
This year, a run of strong growth is ongoing. It is uneven across industries, coming as a reflection of the structural transformation of the economy. But it is an ongoing trend in the majority of industries.
On the other hand, the rise in prices for the vast majority of goods and services shows that demand is outrunning the expansion of economic capacity and the economy’s potential.
Many might compare the current increase in the key rate with what occurred in
We are now in unprecedented territory, when almost all production facilities are working at full capacity. Never before has unemployment been at as low as 2.4%, and only few countries can boast this strong decline in inflation. We are closely monitoring trends in the real sector. Our surveys show that as much as 73% of businesses are struggling with labour shortages. Clearly, loans have become less affordable in recent years, but until October, the affordability of loans was far behind labour shortages as the key factor holding back production.
The deputies often said at our meetings that costly credit was the key barrier to business development. They provided specific examples illustrating this was the case.
However, systemic decisions in macroeconomic policy cannot be based on specific examples. The impact of our tools extends to the broader economy including all production facilities, at the same time. We work with data that allow us to judge the overall economic picture. Furthermore, we rely on monthly surveys of 15,000 businesses alongside the direct discussions of problems with businesses. The heads of our regional branches are in constant dialogue with businesses of different size and industries. Each time we make a key rate decision, we take into account their views on current regional developments.
According to current data, the economy is undergoing major structural shifts. This is clearly seen from the record growth of investment, which is more than 25 per cent up over the past three years. These are investments in new production facilities, import substitution and new transport corridors. A number of major projects are about to launch in mining and quarrying, manufacturing, transport, and agriculture. These projects measure investments by billions and tens of billions of rubles, and they meet the key needs of the economy.
There are sometimes warnings out there that unaffordable credit will mean the end of investment. That is not true. Next year, some industries and companies are going to register continued growth in investment. It is only natural that investment is in for some decline if business owners have invested enough and enjoy sufficient capacity to meet current demand. Yet, it will overall remain at the high level of recent years, even though credit is projected to be costly for a while.
Another major shift is being seen in labour productivity, which is growing across most industries, both in production and services. Everyone has agreed on the need for this. However, it is only recently that businesses have become incentivised to raise productivity and automate production as demand expanded, and all the standard ways of expanding production through new hires have stopped working.
Behind a sustainable real sector and sustainable investment — which are both essential for investment activity — is corporate profits. Last year, corporate profits topped an impressive ₽33 trillion, and according to available data, profits for the first eight months of the year totalled ₽32 trillion. Although the middle of the year was marked by a slight decline, the profits are still close to last year’s highs and are double those of 2019. For businesses, this is a significant resource for investment and a financial safety cushion.
Trends are certainly uneven across industries, and even more so within them. It is however not correct, as they sometimes automatically assume, that the great profits of the real sector are only thanks to mining. As for mining, real profits adjusted for accumulated inflation remained virtually unchanged. But since 2019, profits have more than tripled in construction, have risen in agriculture, and have more than doubled in manufacturing.
Now let us understand the origin of the high demand I often talk about. Household incomes are up, and this is certainly a welcome sign, while public spending has increased, which was inevitable. But most importantly, we have seen a strong, unprecedented, rise in lending. Since early 2022, household loans, including mortgage loans worth ₽9 trillion, have grown by almost ₽15 trillion. Corporate loans increased by ₽30 trillion.
Last year and this, the run of rapid growth in lending is ongoing. It is good that growth is continued, but its pace must be more moderate and commensurate with the economy’s ability to ‘digest’ it without accelerating inflation.
Yet, it was a challenge to rain in the accelerated credit. Over the first nine months of this year, household lending went up by ₽4.7 trillion, and corporate lending by more than ₽10.5 trillion.
The signs of a slowdown rather than a decline — let me say this again — has only emerged in the second half so far, and only in household lending. Its growth has almost halved relative to the first half. Our monetary policy made a decisive impact, with the rollback of universal subsidised mortgage lending and the tougher measures to control households’ over-indebtedness also mattering.
We saw a slowdown in mortgage lending, among other things, but its basis was a very high level that was unsustainable. This is not a drastic fall as it is often painted, and there is no credit squeeze in terms of total amounts. What we are rather seeing is a return to the level of the first quarter this year, a time of a cooler market relative to today. Currently, the market is gaining support from the Family Mortgage programme. In October, this programme accounted for over half the disbursements (54%). Overall, as much as ₽2.2 trillion worth of full-year loans may be extended, which is comparable with 2023.
Arresting an overheating housing market is the first step towards more affordable homes again. Indeed, for this to happen, household incomes should outpace house price growth. The second step is to return affordable commercial mortgage loans. Today, only few borrowers can afford them. Many had to postpone their home purchases, and we are well aware that it is imperative to engineer a faster return of commercial rates to moderate levels. However, this can only be delivered if inflation is low.
While on the subject of mortgage lending, I should stress that borrower problems have always been the focus of the State Duma. I hope we are able to discuss next steps in our efforts to protect consumers in the microfinance market in the near future. The time of these next steps has come. We know that deputies are concerned about protecting citizens who have to take out microfinance loans. It is important that the situation with instalment plans that are gaining in popularity does not go unchecked. An instalment plan is tantamount to a loan, but unlike loans, instalments are unregulated and consumer rights are not protected. We hope that this topic becomes a priority for the State Duma.
Returning to current trends in lending, unlike retail loans, corporate loans have yet to decelerate. There are no signs of them moving slower yet. At ₽1.6 trillion in August, corporate loans are level with September and comparable with October, flash estimates show. Admittedly, they are marked with overly uneven distribution.
Lending activity is indeed expanding slower in a number of industries — in response to the recent monetary policy tightening. However, some sectors and major borrowers are still showing demand for large-scale financing. This is to bring ongoing large investment projects to fruition and to launch new projects.
The fact that borrowers of a certain type are less sensitive to the interest rate has two consequences. Let me focus on them. First, a higher key rate is needed, all else being equal, to make the desired impact on overall lending. Inflation depends on the overall growth rate of credit, and its contribution to money supply and demand in the economy. Our decisions made recently factor this in.
Second, we are concerned about the risk of major companies becoming overindebted. We are discussing the risks and making efforts to prevent households from becoming highly indebted, intending to tighten banking regulation. In November, we unveiled our action plan. It involves measures to help reinstate a more moderate pace of growth in corporate lending, and crucially, ward off the risk that such major companies should accumulate excessive debt.
Colleagues, we are at a tipping point. Banks and businesses expect overall growth of corporate loan portfolios to decelerate, and its contribution to growth in aggregate demand to fall in the next few months. There will be a certain lag, and lags are very important here, before current inflation slows, and thereafter we will see a turnaround in annual inflation measures.
This will be the evidence of monetary policy having become sufficiently tight to tame price growth, given all the factors driving inflation.
I should certainly mention the common view according to which a rising key rate does nothing but accelerate growth in prices by sending costs higher. This is a deep-seated misconception. The key rate works as an efficient anti-inflation instrument. Had we kept the key rate at its level in the middle of last year, that is 7.5%, we would have more than double-digit enduring inflation. It could even sit at 20%, 30% or more.
It is true that high interest rates increase interest costs of businesses. But we should remember that the ratio of interest costs to production costs over the past five years has on average been 5% or less. Clearly, some highly indebted companies have financed their growth by borrowing, rather than by equity capital or investment on the back of profits. Moreover, productivity, costs or efficiency were not the focus of their attention. However, the total economic effect of interest costs on inflation should not be exaggerated.
Yet, the cooling effect of tight monetary policy on excess demand and thereby on inflation is much more significant. When they say that high interest rates push up corporate costs, they tend to forget that the growth of all their costs is a major contribution to high inflation. It is much more of a problem for businesses when almost everything is becoming more expensive: raw materials, components, logistics, equipment and labour. This is a reflection of high inflationary pressures in the economy. In an environment of excess demand, the runaway growth of costs are passed on to final products.
Interest expenses will rise only temporarily; they are set to fall again after beating inflation. Unfortunately, the increase in other operating costs driven by high inflation is irreversible.
Now on to our forecast. We believe that our policy will bring down inflation to
I would also like to say that, as usual, the Monetary Policy Guidelines present alternative scenarios. We must always be prepared for a worsening of conditions. As a rule, we only calculated risk scenarios including the response to a potential global crisis. Having said that, let me stress that current developments are setting the stage for a more optimistic, ‘Above Potential’, scenario. It is based on the premise that the large-scale investments of recent years are next year entering the production phase to bring higher returns in the economy.
If so, supply will catch up with demand faster and inflation will decelerate quicker, enabling a speedier return of the key rate to its neutral level. Importantly, this scenario is close to the baseline scenario of the Government.
However, the Monetary Policy Guidelines also present a pro-inflation scenario to account for the rationale behind our action.
Let me explain why I disagree with the idea of more tolerance towards inflation. Now and then, we hear such suggestions.
First, after four years of high inflation, households view the steady rise in prices as cause for concern. Low-income groups are hit hardest. These are people whose incomes do not grow or grow far slower than average according to statistics. You know better than me that there are many such people.
Second, the return of inflation to 4% is an enabler of sustainable growth of multiple years rather than a one-off uptick, even if truly impressive. It is imperative that it boosts national welfare. This is the ultimate goal of our joint efforts.
Third, the proposals that we essentially take a wait-and-see approach until inflation is down assume that macroeconomic stability is at this moment of lower priority, and that it may be risked for the sake of a speedy economic breakthrough. I am convinced of the opposite: we must value it more than ever. I wonder how we would have navigated 2022 without a sustainable budget acting as a cushion to ramp up spending, if not for inflation having been kept in check over the previous years, and a steady banking sector? No less important is the alignment between Government and Bank of Russia policies.
At our meetings, deputies asked me why the Bank of Russia’s and Government’s policies are diverging.
Indeed, the tight monetary policy of the past year was concurrent with an accommodative fiscal policy. As a reminder, both monetary and fiscal policies were tight from 2014 onwards; in 2022 and right up to the middle of 2023, both the Bank of Russia’s and Government’s policies were accommodative and aimed to shore up demand.
It may appear as if the Bank of Russia and the Government represent opposite poles. This is not at all true. The Government relies on the budget to finance structural change projects and ramp up investment in priority areas. Evidently, these objectives require higher government support to the economy. This is where monetary policy plays a special role as it brings price and macroeconomic stability.
Incidentally, the reinstatement of a normal fiscal rule next year is set to constrain the impact of public spending on inflation.
The Bank of Russia and the Government are at this stage in no less alignment than back in 2020 or 2022, when we had to overcome the fallout from the pandemic and sanctions. Inflation is always about the ratio of demand and supply, that is the output of goods and services. The Bank of Russia influences demand with its tools, and the Government has levers to influence supply and close bottlenecks in infrastructure, technology, and some commodity markets. Our decisions factor in the Government’s fiscal policy and structural measures alike.
In conclusion, I would like to make the case for our monetary policy decisions. Any fluctuations or deviations are nothing less than a complication and delay on the path towards the socially important goal of low inflation. The benefits in terms of macroeconomic stability, measured rates, confidence in the ruble and, most important, in terms of maintaining households’ real incomes, far outweigh any temporary limitations.
Therefore, dear State Duma deputies, I count on your support for our willingness to address the task set out in the Bank of Russia law — maintaining price stability, including creating conditions for balanced and sustainable economic growth.
Thank you for your attention.