Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 20 December 2024
Good afternoon,
Today, we have made the decision to keep the key rate at 21% per annum.
Tight monetary conditions that have formed in the economy are to ensure a slowdown of inflation in the next few quarters. Since the October meeting of the Board of Directors, monetary conditions have tightened even more than was implied by the key rate increase. This additional tightening is associated with, among other things, banks’ response to the regulatory measures taken by the Bank of Russia. Consequently, lending growth notably slowed down in November. We will need some time to assess how steady this deceleration in lending is and how the economy is adjusting to the new conditions. Therefore, we are taking a pause in raising the key rate. We will assess the need for a further key rate increase at our upcoming meeting. I would like to stress that due to the considerable deviation of inflation from the target monetary conditions should nonetheless remain tight for a long period in order to secure bringing inflation back to 4%.
I would now dwell on the reasons behind our today’s decision. This time, I will explain them in the order our key rate decisions are transmitted to inflation. At first, the key rate translates into monetary conditions, then it influences economic activity, and ultimately it impacts inflation.
Firstly, I will speak about how monetary conditions have changed since our previous meeting.
Pricing a loan, banks rely on either the key rate level if it is a floating rate loan or the expected key rate level if it is a fixed rate loan. Further, banks add a certain a spread. Before the October key rate meeting, the spread between the key rate and banks’ interest rates averaged about
What are the reasons behind such significant changes in monetary conditions? This has been largely because of our regulatory measures we announced in advance that were needed to enhance banks’ financial resilience.
I would like to remind you that, in 2022, the Bank of Russia introduced a number of regulatory easing measures. They were required to ensure bank lending to the economy on a continuous basis and in adequate amounts, despite the sanctions and the freezing of Russia’s foreign assets. These measures have helped prop up economic activity during the acute phase of the crisis. However, such easing measures cannot be permanent — they are implemented for a short term to address crisis issues. In 2023 H2, we announced the start of their phasing-out. Nevertheless, as domestic demand was expanding, banks continued to actively increase lending. Yet, the growth of the loan portfolio was not accompanied by a comparable rise in banks’ capital and highly liquid assets. In order to avoid excessive accumulation of risks, we have been consistently raising the requirements for banks’ capital and liquidity. This policy will continue to improve the financial sector’s resilience and will not depend on the key rate level.
We employ a number of different tools depending on the purposes: some are aimed at ensuring financial stability, while others help achieve price stability. That said, when making our monetary policy decisions, we take into account decisions in the banking regulation. I would like to reiterate that the banking regulation measures are not intended to achieve monetary policy objectives — we have the key rate for this. Nevertheless, when making our key rate decisions, we do factor in the consequences of changes in the banking regulation, including their effect on lending activity.
After the phase of the rapid increase in lending, banks are now moving on to a stage of using their capital and liquidity with more prudency and reason. Further on, lending growth pace will depend on, among other factors, banks’ capabilities to build up capital. Accordingly, the expansion of lending may be expected to be slower next year, while banks are to shift towards more conservative approaches to assessing borrowers’ risks. We can predict this judging by banks’ moderate plans to increase their loan portfolios next year.
The effects of the monetary tightening started to manifest themselves in November 2024. The growth of the overall loan portfolio considerably decelerated. Moreover, the expansion of the corporate loan portfolio slowed down for the first time over a long period. The retail loan portfolio has remained virtually unchanged for two months now. According to high-frequency data, credit activity remained moderate during the first weeks of December.
Simultaneously, savings have continued to go up, driven by high deposit rates. Our today’s decision will support the current level of saving activity.
Secondly, the economy.
In October and November 2024, economic activity remained high, propped up by growing domestic demand, including household consumption. This was largely the result of the accumulated effects of the fiscal stimulus, high credit activity over previous months, and increased household incomes. High-frequency indicators suggest that the situation is gradually changing. Specifically, companies are setting more moderate targets for output, postponing or more carefully selecting investment projects, and reducing their borrowing plans for the next year.
As reported by the Bank of Russia’s regional branches, there are signs of cooling in construction, coal production, and metallurgy. Furthermore, there is a number of enterprises that have reduced the demand for labour. As a result, we observe a more active reallocation of workers from some industries to others that are still experiencing considerable staff shortages. This process is alleviating the pressure on the labour market.
Thirdly, inflation.
Inflation has accelerated in recent months, largely because of transitory factors. In particular, there has been a rise in the growth rate of prices for some food products, especially vegetables. This was associated with the bad weather that notably worsened the harvest of some crops. Another important contributor to the November statistics was the increase in the telecommunications and transportation tariffs.
However, the high figures of October—November and the first weeks of December were generally the result of domestic demand that had been soaring during previous quarters. Factoring in the time lags, this overheating has been translating into current inflation, primarily its underlying components.
Inflation expectations continue to exert additional pressure on prices. Households’ and businesses’ inflation expectations are largely backward-looking, that is, are affected by the price dynamics observed in the past. Consequently, high inflation has a self-reinforcing effect through inflation expectations. In other words, high expectations contribute to elevated demand entailing high inflation, which in turn further increases inflation expectations. In such a situation, even one-off factors might become persistent. In December 2024, the growth of households’ and businesses’ inflation expectations was also affected by the ruble weakening.
When making our monetary policy decisions, we rely on the forecast of inflation and changes in its drivers. We are observing a notable slowdown in lending growth, which will have a significant disinflationary effect. Due to the accumulated inertia of inflation and the time lags of monetary policy transmission, this effect will be manifesting itself gradually. We expect that inflationary pressures will start to weaken sustainably as the effects of tight monetary conditions increase.
Briefly about external conditions.
The main trends in the world economy have remained unchanged. Global economic growth has been generally decelerating. Export dynamics in 2024 Q4 have been slightly weaker compared to steadily high imports. Coupled with another package of sanctions, this negatively affected the ruble exchange rate in November. The actual tightening of monetary conditions and the accumulated effects from our policy will ensure a more balanced growth rate of imports in the future.
I would now dwell on the risks to the baseline forecast.
Proinflationary risks are still our main focus. In the first place, high and, moreover, still rising inflation expectations might extend the period needed to bring inflation back to the target. The longer inflation deviates from the target and the longer it stays at high levels, the longer the period of high interest rates should be for economic agents to restore their confidence in price stability. Secondly, the risks related to the labour market are still a key constraint hampering economic activity normalisation. Thirdly, the risks of trade wars and a more notable slowdown in the world economy have become slightly higher. This group of risks also includes a possible rise in geopolitical pressure.
The key disinflationary factor is a more substantial deceleration of lending growth than assumed in our baseline scenario, which might be facilitated by, among other things, banks’ willingness to pursue more conservative lending policy. This might result from both tougher capital requirements and an increase in banks’ lending standards. A major point of uncertainty is how the economy will be adjusting to the new conditions. When making our future decisions, we will scrutinise the influence of these factors on the economic environment.
Winding up, I would like to speak of our future decisions.
Today, the key rate is rather high and, combined with the banking regulation and more conservative strategies preferred by the banks, it means considerably tightening monetary conditions. We will need some time to assess all the effects of the current level of monetary tightness. In February 2025, we will be choosing between two options. We will either make sure that monetary conditions are sufficiently tight or return to discussing a key rate increase if the current overheating of demand persists while lending starts to expand again. Our main objective is to achieve price stability within a reasonably short period and we will take all necessary measures to do this.
Thank you for attention.