Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 20 March 2020

Since the time of the previous Board of Directors meeting, the situation has changed drastically — primarily in the global economy, and in world commodities and financial markets. Currently, events are evolving according to a scenario different from the implications of our baseline scenario at the beginning of February.

I would rather say that today’s Board of Directors was quite non-typical. First, we considered and weighted multidirectional options of the key rate decision. Second, in addition to the key rate decision, we adopted a whole range of measures aimed at maintaining financial stability, supporting households and business, and providing credit to the economy amid the coronavirus pandemic. With today’s meeting not being a core one, this is exactly why we are conducting this press conference, where we want to clarify our assessment of the situation and the decisions made.

First of all, I would like to talk about the nature of the current events and the peculiarities of their impact on the Russian economy. This, to a large extent, determines the logic of our decisions and measures taken.

The situation today is really complicated. Throughout the world and in Russia. The coronavirus pandemic and measures taken to contain it exert pressure on the global economy, which simultaneously reduces both output and demand, and influences the behaviour of businesses and households. Volatility in financial markets has surged. The pandemic developments were accompanied by a profound drop in oil prices caused both by a considerable increase in oil production and a considerable decline in its consumption.

Uncertainty and concerns about further developments in the coronavirus situation may trigger a local elevated demand for individual durable goods and goods with extended storage periods. Though not able to produce long-term consequences, this makes price dynamics more volatile and may eventually bring about an increase in inflation and inflation expectations. Further ahead, in contrast, demand may weaken, thereby producing a downward influence on the consumer price growth rates.

In turn, the slowing of the global economy made investors abandon risky assets. This exacerbated the volatility of capital flows and fluctuations in global financial markets, and raised country risk premiums. Coupled with a sharp drop in oil prices, global volatility dragged heavily on the Russian financial market and led to the ruble depreciation. All this will have a proinflationary effect and may feed through into inflation expectations.

Besides, a fall in the prices of financial assets and an increase in yields in the Russian debt market has been observed. Special attention shall be given to ensuring financial stability.

Therefore today, when making our decision on the key rate and the package of measures to support lending, we proceeded from the comprehensive estimate of all these factors, from the balance of risks to the economy and inflation, and from concerns about ensuring financial stability.

As for the key rate, I have already mentioned that we considered three options, which we do very rarely, namely: to cut, to raise or to leave unchanged.

Our understanding of the mid-term inflation factors was in favour of a key rate cut. Over several recent months preceding the start of the volatility period, disinflationary factors prevailed in the economy. I should note that these disinflationary factors remain deeply rooted. Moreover, given the epidemic and preventive measures, they tend to strengthen: individuals have fewer possibilities to buy goods and services, which translates into pressures upon businesses and, eventually, on households’ incomes. As a result, we may face a slowdown in demand growth. This explains why domestic demand-side factors are currently massively skewed towards disinflationary ones not only in the short run, but also over a longer-term horizon. Given the lags of the monetary policy transmission mechanism on the economy, as well as the absence of other meaningful factors, it would be admissible to cut the key rate now. Over recent weeks, similar decisions have been made by a number of central banks in the countries where such factors are in play.

However, the balance of short-term risks has shifted towards proinflationary ones. Influenced by the weaker ruble, inflation this year will not only get closer to the target faster than previously anticipated, but may temporarily exceed it. It is obvious that the dynamics of financial markets and the risks of a possible further decline in oil prices affect inflation and devaluation expectations. This makes it important not to allow the inflationary spiral to whirl up. Higher interest rates are advised to stabilise expectations. Besides, we understand that amid elevated volatility in the financial market, our monetary policy decision may also affect financial stability. If we consider these factors alone, a decision to raise the key rate would be appropriate.

The decision, that we made, to keep the key rate unchanged, in the current environment balances the impact of short-term and mid-term factors, risks to inflation, to the economy and to financial stability. We expect that a possible temporary hike in inflation and a drop in economic activity in 2020 will be followed by an improvement in economic dynamics in the future, and inflation will return to the target — close to 4% — in 2021, taking into account the current monetary policy.

As for the signal for the future, we will continue to use the same logic when making decisions by assessing each time the balance of factors and the balance of risks associated with making decisions on a case-by-case basis.

I would like to reiterate that the key rate decision has been made in conjunction with other Bank of Russia measures aimed at mitigating risks to the economy and supporting our citizens in difficult conditions.

The Bank of Russia is now introducing a broad range of additional measures to supplement the initiatives already adopted.

These measures, in the first place, are designed to ensure financial stability and maintain the financial sector’s ability to provide loans to the economy, especially to those individuals and businesses who are especially vulnerable in this situation. These measures will support lending to small and medium-sized businesses, mortgage lending, and help protect the interests of the citizens who suffered from the coronavirus outbreak. We understand that both financial institutions and borrowers will need some time to adapt to the new environment. That is why we took measures to strengthen the capacities and abilities of banks and other financial institutions to restructure and prolong loans to households and enterprises impacted by the pandemic. We will make on-line payments more accessible for households and support on-line retailers.

Besides, we work closely with financial institutions, and no matter what happens next, the smooth operation of the financial sector and the accessibility of financial infrastructure will be ensured. Other countries have already experienced this, and we build on that experience. We have developed respective recommendations; we give individual attention to major financial institutions and cooperate with financial market associations and self-regulatory organisations, keeping track of how they develop and implement respective measures. To facilitate transition to remote work mode for employees, we seek to temporarily relax reporting requirements. We have also temporarily suspended inspections excluding cases that require immediate response.

It is worth noting that unlike key rate changes, whose pass-through on the economic processes comes with a certain time lag, regulatory easing has a faster and more targeted effect, much needed for timely and preventive influence. In addition to mitigating financial stability risks, the implemented measures will curb the unfolded tightening of internal monetary conditions amid global volatility.

We are working closely with the Government to be able to ensure real-time information exchange, to develop comprehensive measures (if need be) — in order to alleviate the impact that negative factors may have on households, the economy and the financial sector.

Q&A for the Media

QUESTION from RIA Novosti:

According to the Central Bank’s press release following today’s Board of Directors meeting, moderate economic growth earlier this year may give way to slower economic activity in the next quarters. Does it mean the Central Bank is forecasting the start of a recession as early as 2020 Q2?

ELVIRA NABIULLINA:

A recession is usually defined as negative economic growth during several quarters, at least two. We do see that growth in 2020 Q2 may slow down, and the final 2020 Q2 figure is likely to be lower than in 2020 Q1. But we are inclined to think that the annualised growth rate will most likely remain in the positive territory.

The 2020 Q3 performance will depend on the many factors I mentioned earlier. We act on an assumption that 2020 Q3 will see a stabilisation brought about in part thanks to the measures that are being implemented by the Government and the Bank of Russia.

QUESTION from Reuters:

The tone of the press release was perceived by many as quite mild. Does it indicate that a rate hike is off the table for the Central Bank in the short term?

ELVIRA NABIULLINA:

As I have said, there were three scenarios on the table, and we actually looked into each of them in detail. There is a case for each of the options. We believe a rate hike is still possible, we did discuss that. We cannot rule out long-lasting inflationary factors that might emerge going forward, either. We will keep track of financial stability risks that usually transform into pro-inflationary factors. Subsequently, we do not rule out considering such an option at one of the next Board of Directors meetings.

QUESTION from Interfax:

The Central Bank acknowledges that inflation in 2020 may temporarily exceed the 4% target. How much could inflation overshoot the target? Which time of the year will see its peak values? Should we expect any response by the Central Bank to the projected overshooting or will the regulator disregard it as a transient spike?

ELVIRA NABIULLINA:

According to our assessment, inflation could reach its peak value in 2021 Q1 due to both the base effect — we are witnessing the lowest inflation on record — and lagged passthrough of the ruble depreciation effects into inflation.

However, given our current estimate, we do not think it will be a significant overshooting, including due to low inflation rates. We can now safely say we have some room in this respect. As we repeatedly indicated, we will only respond in the case of a significant and protracted deviation of inflation from the target, in the case of such a risk, and the risk of secondary effects.

This is why we will continue to monitor the developments. It may so happen that there will be no case for such a response.

QUESTION from Kommersant:

What is the Bank of Russia’s current estimate of the equilibrium key rate? Has it gone up, down, or remained unchanged?

ELVIRA NABIULLINA:

We have not revised our estimate of the equilibrium rate — we still believe it is 2?3% in real terms. And, as we said earlier, it is likely to be closer to the lower bound of the range.

QUESTION from Reuters:

If the Government declares a national emergency and shuts down borders in Moscow and other cities, how would that affect inflation? Can the Central Bank be certain that it will not prompt a twofold increase in petrol or food prices?

ELVIRA NABIULLINA:

We do not see the risk of a sharp or steady price growth in general or for any specific types of products. Indeed, there are different factors in play. Some of them are pro-inflationary. Quite understandably, people are buying up, stocking up, which leads to elevated demand for some products, particularly non-perishable goods. Most likely, it is the so-called leftward shift or advanced purchases of goods that people would buy anyway. But they are doing it today to stock up.

On the contrary, we may see disinflationary factors coming into play. We believe that they are more likely to prevail due to potential demand contraction that may follow.

QUESTION from Bloomberg:

How much may Russia’s economy slow down this year? Could you share your new forecast, both the baseline and the risk ones? What oil price level do you use as a benchmark? Would you call the current economic situation in Russia a ‘crisis’?

ELVIRA NABIULLINA:

We do not take for granted that the annual growth rate will be negative at year-end. On the contrary, we do not yet expect a decline in the economy for 2020. We will be revisiting our forecast; we are working on it now. The next core Board of Directors’ meeting will take place on April 24, and we will offer our forecast with the appropriate assumptions there.

Again, we are aware that ongoing developments represent a major departure from our baseline forecast. So we will be revising our outlook, including on oil prices.

Now, regarding the right definition of the evolving situation. It would be proper to describe it once this period is over, and it is a difficult one. Most importantly, we can handle it thanks to our buffers and a stable financial system. We have the full range of tools to curb the risks. Not just to curb the risks, but also to buttress economic activity and lending under the circumstances.

QUESTION from Interfax:

Is the Bank of Russia considering an easing of the required reserve ratios, including for foreign currency liabilities, and a lower base rate for contributions into the compulsory deposit insurance fund?

ELVIRA NABIULLINA:

The regulatory relaxation package adopted today do not list the above-mentioned two measures, a lower required reserve ratio and a lower ratio of contributions to the Deposit Insurance Agency. We do not feel that is needed.

Here is what I would like to point out. Our current regulatory relaxations are different from the ones that we implemented in 2014, even though some policies could appear to be the same.

Here is why. Back in 2014, we knew we had to support the financial stability of financial institutions and we eased our requirements to make sure they could adapt their financial indicators to the new reality. Today, our regulatory easing is largely needed to support and incentivise lending to the economy, businesses and households. There is no need to support financial stability since the financial system in general is fairly stable. It has a capital cushion in the form of buffers.

As a reminder, there is the systemic importance capital buffer for major banks and the capital conservation buffer. In total, it is more than 2 trillion, 2.3 trillion rubles to be precise. Banks can rely on these buffers. They would have to cut executive bonuses and dividends, though. But they have this backstop to fall back on.

Again, all our measures serve to support lending.

QUESTION from TASS:

Will the Central Bank expand the list of systemically important banks? Will the banking sector need a capital injection this year like it was following the 2014 crisis? Have any banks turned to the Central Bank for such support?

ELVIRA NABIULLINA:

We do not believe it is necessary to revise the list of systemically important lending institutions. We might change some of the criteria. We will refine them. However, it is not driven by the developments in global markets or the Russian market. It is time for our framework to be updated, and we are discussing these updates with the market participants.

We do not believe there is need for recapitalisation. We are running stress tests and will continue to run them with a primary reason to get an understanding of how the entire banking system and individual banks may behave under the highest-risk scenarios. According to these stress tests, our system is stable. Even if there are issues, they are bank-specific, not system-wide. Again, we do not see any need for recapitalisation and no bank has asked us for it.

QUESTION from Izvestia:

The support measures for households are insignificant and only apply to COVID-19 patients, for example, in the form of loan restructuring and payment deferrals. Is there a chance that these measures will be extended to anyone who is struggling financially? If yes, what will the eligibility criteria look like? Does the regulator have plans to buoy up consumer lending to drive domestic demand?

ELVIRA NABIULLINA:

The relief package is likely to be expanded and become more targeted as the situation unfolds. Indeed, right now we have focused on what we believe to be evident steps. Again, we are working hand in hand with the Government. The Government has put its own policies in place, including targeted assistance for individuals and businesses.

Nevertheless, we proceed from an assumption that banks and other financial institutions would take a soft line toward those customers who could face some difficulties, particularly because in most cases it could be a temporary situation, and restructure or extend their loans. As a regulator, we are offering a number of measures and incentives. It would not end up as an additional burden on capital or provisions in those cases and in those sectors where we see that it has happened due to the pandemic.

Now on consumer lending. We need to be guided by the reality on the ground and ongoing developments in consumer lending but so far there have been too few field data. There is one point I would like to underscore. We do not feel it appropriate to maintain economic growth or demand through issuing more and more loans to over-indebted people who do not know how to service them. That is exactly what we sought to avoid by introducing the debt burden ratio. First, it is a way to avert financial stability risks and, second, it helps to avoid a social fallout when overleveraged customers are digging themselves deeper and deeper into a debt pit.

This is why we will continue to track progress. For the time being, there is no need to scrap these add-ons or ease consumer lending regulations.

QUESTION from RBC:

As part of the transactions related to the divestment of Sberbank, the Central Bank set a new cut-off price for oil at $25 per barrel. Why exactly $25 and could it change?

ELVIRA NABIULLINA:

Indeed, the fiscal rule has had a stabilising effect on the economy and all the indicators and will continue to do so. The reference oil price is set at $42 per barrel. However, we have noticed that the stabilising effects of the fiscal rule may diminish as prices are getting increasingly lower than the cut-off one.

Subsequently, as part of the deal to sell Sberbank we considered it admissible to fully offset the effects of lower FX revenue from the exports of crude oil, petroleum products and natural gas due to oil prices dropping below $25 per barrel. Again, it was not an attempt to set a certain exchange rate or protect some rate, the intention was to dampen volatility in the FX market during this time. So this is not a new cut-off price, it only served to bolster the stabilising effect of the fiscal rule under quite a low oil price.

QUESTION from Reuters:

How many times may the daily sales volume grow due to the conversion of foreign currency from the National Wealth Fund for the Sberbank deal?

ELVIRA NABIULLINA:

According to our formula, sales will depend on how much oil prices depart from $25 per barrel. The amounts are disclosed with some lag, and you will see them. But these volumes will depend on the developments in the oil market.

QUESTION from Rossiyskaya Gazeta:

Is the Bank of Russia planning to return to the key rate cutting policy once market volatility subsides? Would it be safe to say that it is highly likely to happen no earlier than the Board of Directors’ meeting in June?

ELVIRA NABIULLINA:

It is true that we see potential for further rate cuts in the medium term. As I said, we tend to believe in the prevalence of disinflationary factors in the medium term. However, it is pro-inflationary factors that dominate in the short term. And on top of this comes the instability in financial markets that we mentioned earlier.

The time when we can go back to cutting the key rate depends on the turn the events will take, and we will continue to keep track of them. I do not think it is appropriate to give any deadlines.

QUESTION from Vedomosti:

Could the Bank of Russia weigh in on the monetary measures by the ECB and the Federal Reserve? Do you share the opinion that the effect of monetary measures for the real sector could eventually be muted? Which model will the Russian economy adopt — will it be a monetary or fiscal stimulus?

ELVIRA NABIULLINA:

A specific mix of monetary and fiscal policies — and structural measures, mind you — depends on the situation and the challenges that require this or that response. From what we see, both the ECB and the Federal Reserve are now facing issues related to financial markets, financial stability, and liquidity, and are appropriately taking monetary actions.

It is clear that in many developed countries the range of monetary tools and their potential is limited due to record [low. — Ed.] rates. It is natural that many countries primarily rely on fiscal measures to stimulate the economy, the real sector, and to drive supply and demand. We also need to deploy a mix of monetary and fiscal measures. And I believe that we will work with the Government, each playing our own part, to implement an effective combination of such policies as the situation evolves.

QUESTION from Interfax:

There have been reports that the US is mulling possible sanctions against the Russian oil industry to support global oil prices. Does the Bank of Russia take these risks into account? Have you discussed this issue with the Russian authorities? What are the odds of such a scenario?

ELVIRA NABIULLINA:

It is hard for me to assess the odds. I can only reiterate that we have lived under sanctions for several years now, and there are always rumours of new sanctions, and new actions, too. We are fully aware of these challenges. Our priority is always maintaining this safety cushion, the stability of the financial system and the stability of the economy in general to be able to respond to these challenges. We have a more stable financial system now. We definitely factor in such issues in our risk scenario, and we will revise our projections as the events evolve.

QUESTION from RIA Novosti:

The Bank of Russia has left out its guidance on further key rate decisions from its statement. Does it mean that the regulator is considering any extraordinary, unscheduled rate decisions?

ELVIRA NABIULLINA:

True, there are a number of potential scenarios right now. As I have said, we reviewed several rate options, namely to cut, to raise or to leave the rate unchanged. So there are different options. As for extraordinary meetings, they are called extraordinary because by definition you never know exactly when they may be convened.

QUESTION from Izvestia:

Is the Bank of Russia considering an OFZ buyback?

ELVIRA NABIULLINA:

Indeed, we have received such offers from some financial institutions. And we do have such an option as part of our toolkit. Actually, it is fairly extensive, and there is a variety of policies we could use but so far there is no need for them. The OFZ yield curve is changing in sync with the developments. It is on our radar but we do not feel that the deployment of such a tool is warranted at this stage.

QUESTION from The Bell:

What is the Bank of Russia’s assessment of the risks associated with foreign capital flight from the government debt market? What will be its course of action if these risks materialise?

ELVIRA NABIULLINA:

We do have a significant share of foreign investors in government bonds. It was an appealing market in the light of the macroeconomic situation. I would not call it ‘flight’, it is just that some investors sell our sovereign bonds, most likely, because they need liquidity. So it is not so much about fleeing the Russian jurisdiction as individual investors taking decisions at their own discretion.

We do not expect any major issues here. We have made multiple calculations for a scenario of a major outflow from Russia’s sovereign bonds. There will be a limited fallout primarily because our public debt is small, it is modest in size. Subsequently, we do not expect any major impact.

What we see is that foreign investors may be prompted by certain events to quit, but that they come back in a while. You may recall that was the case in 2018 during a time of volatility over new sanctions. There is nothing to worry about. Again, Russia’s public debt to GDP is significantly lower than in many other countries.

QUESTION from RBC TV:

There is an increasing number of governments that are using direct payouts to individuals as one of the relief measures to support the economy. What is the Bank of Russia’s stance and are stimulus checks possible in Russia?

ELVIRA NABIULLINA:

Many countries resort to such a measure when they have run out of other tools. First, they cut rates to zero or below, launch massive programmes to purchase securities that result in bloated central bank balance sheets, and when these steps no longer spur demand, lending and other activities, governments put such options on the table. It is hard to estimate their effectiveness, though. There are so many concerns over whether the stimulus is going to ultimately reach consumers and drive consumer behaviour and demand.

In any case, there is definitely no urgency for such a measure under our circumstances. We have a lot of leeway on the key rate and other tools at our disposal to support households both in their incomes and consumer activity. Again, it should be done together with the Government.

QUESTION from Tverskie Vedomosti:

Could higher rates push demand for mortgage loans further down and effectively negate government efforts to make housing more affordable for young families and families with many children?

ELVIRA NABIULLINA:

Certainly, promoting the mortgage market is an important long-term trend. There has been a lot of progress in the market and greater diversity in its products. It is true that the new reality has pushed some banks to raise mortgage rates. Interestingly, this is happening while our key rate remains unchanged. One simple reason is that sovereign bond yields are up.

Nevertheless, we have taken a series of steps, including as part of today’s aid package, to support the market and mortgage lending. We have put mortgage bonds on the Lombard List, or rather, allowed them to be included in the List if these mortgage-backed securities meet certain eligibility criteria. Second, we have adjusted macroprudential add-ons for loans with a small down payment. We have split that category into two, going for a more nuanced approach. We used to have fairly serious restrictions for down payments lower than 20% of the total value. Today, we have eased restrictions for down payments between 20% and 15%.

Nevertheless, we believe it is very important to monitor the quality of mortgage loans and a down payment is a must. We hope that, despite the temporary difficulties, the mortgage market will move forward. There are government programmes to support mortgage lending, targeted programmes. We have fine-tuned regulation to help banks roll out these state mortgage programmes without putting an excessive burden on capital and provisions. So regulation is up-to-date, and, hopefully, mortgage lending will continue to grow going forward.

QUESTION from Rossiyskaya Gazeta:

What are the odds of lower mortgage rates in 2020, according to the Bank of Russia? Does it mean we are going to see rates below 8% at a later stage? How much later? Is there still a chance to see rates below 8% as early as this year?

ELVIRA NABIULLINA:

We have expected rates to go to 7?8% by 2024. It is still likely within this period. The rate movements will largely depend on how the situation unfolds.

QUESTION from RBC:

Will the Bank of Russia suspend talks and preparations for deals to sell rehabilitated banks? Will you postpone the bidding process for the Asian-Pacific Bank until later?

ELVIRA NABIULLINA:

No, we have not suspended anything. We are continuing to receive bids for the Asian-Pacific Bank. We also working with investment consultants on the best exit strategy for Otkritie Bank. The deadlines are still in place.

We will definitely take into account the situation in the market, but so far everything is on track. I would like to re-affirm our firm commitment to selling these banks through the market.

QUESTION from Bloomberg:

Schools and universities are shutting down, many offices are in remote work mode. Do you believe it is possible that the markets and exchanges may close down partially? If yes, under what circumstances? Why is it more important for exchanges to stay open than for other types of essential infrastructure?

ELVIRA NABIULLINA:

No, we do not believe such a situation would be acceptable. As I said, we are working with financial institutions and infrastructure organisations to provide for business continuity of our financial infrastructure. There are multiple options here, and we are also building on diverse international experience to get ready in the best way possible. There are teleworking options. It is not always possible but there are still ways to ensure continuous operations where it is necessary. There are jobs where you need to be physically present or operate in shifts, and so on. We are using the full range of options, and the markets must be up and running. No shutdowns here, that is out of question.

QUESTION from Rossiyskaya Gazeta:

Has the Bank of Russia set any psychological threshold for the ruble exchange rate that would trigger an emergency response to stabilise the ruble?

QUESTION from Reuters:

How could the Central Bank comment on the expectations that the ruble may depreciate to 100 per dollar amid low oil prices and the coronavirus pandemic?

ELVIRA NABIULLINA:

We have a floating rate. We do not comment on the exchange rate. But again, there is no threshold, either psychological or any other, that can act as a trigger for any exchange rate-related action. Definitely, we are monitoring the developments in FX markets and other financial markets to avoid financial stability risks. We have the full range of tools here at our disposal. On top of regular fiscal rule-based interventions, we can always intervene to buy or sell FX in the market at our discretion, if need be. So far, it is not necessary.

QUESTION from TASS:

Today, the Bank of Russia has announced that banking fees in the Faster Payments System will be limited for end consumers. How long will that limit last or is it here to stay?

ELVIRA NABIULLINA:

We will be monitoring the situation but we believe it principally important to introduce these limits: there is significantly greater demand for online payments and we need to provide an opportunity for it. This is why we believe it is necessary to use our right to limit [fees. — Ed.] for these payments. We will continue to monitor further developments.

QUESTION from Kommersant:

Did you have a divided vote at the Board of Directors meeting? Any minority reports?

ELVIRA NABIULLINA:

We do not disclose our votes. Again, we did discuss — in detail — all the three options, the case for each of them, and the rationale. We had the three options on the table and all the members of the Board of Directors, all the meeting participants discussed them in detail sharing both the pros and the cons.

QUESTION from Bloomberg:

Did the Government seek advice from the Bank of Russia over its March OPEC+ decision that resulted in the deal collapsing? Have you expected that the collapse of the deal would be followed by a crash in oil prices?

ELVIRA NABIULLINA:

Certainly, the future of the deal was discussed at various platforms. I believe that the effect of the withdrawal from the OPEC+ deal that we are seeing today has been greatly exacerbated by the COVID-19-driven developments in global financial markets and its impact on demand and supply. In this respect, the situation is not an easy one because, again, we have concurrent oil supply growth despite a pre-existing glut and demand contraction.

Nevertheless, we will continue to monitor the situation. Our priority is to be prepared for any development. We have stability in our financial system, in the banking sector and in the economy in general that would help us overcome the current situation.

Thank you.