Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 24 July 2020
Today, the Bank of Russia Board of Directors made the decision to reduce the key rate by 25 bp down to 4.25% per annum. At the upcoming meetings, we will consider the necessity of further key rate reduction.
We have continued to ease monetary policy, primarily taking into account that the risks of the downward deviation of inflation from the 4% target in 2021 remain. These risks result from the slump in economic activity and the decline in domestic and external demand. According to our estimates, the recovery will take over 1.5 years, which will have a restraining effect on prices.
I would like to stress that the specifics of the current moment is that the situation associated with the pandemic and the easing of the restrictions both in Russia and abroad, in various regions and sectors, is unfolding very non-uniformly. In June — the first half of July, when Russia started to ease its lockdown requirements, economic processes in the country were reviving, which included the recovery of power consumption, rebounding consumer and investment demand, the expansion of construction and consumer goods output, and a slower annual decline in freight turnover and industrial output. However, although businesses’ and households’ sentiment was improving, overall they remained cautious amid the persisting high uncertainty about how the situation might be unfolding further on.
In June, the current monthly growth rates of consumer prices were significantly varying across different product and service groups due to the diverse impact of demand- and supply-side factors in individual markets. Nevertheless, overall inflationary pressure is weakening, after the increase in March — April, which is evidenced by stable inflation indicators, adjusted for one-off factors. Households’ and businesses’ inflation expectations have stabilised overall after the decrease in May — June. Professional analysts have lowered their inflation expectations for the next year beneath 4%.
We expect that the recovery pace in the economy and price dynamics will also remain non-uniform over the next few months, which may slightly obscure the developing trends. Nonetheless, in terms of the key rate decision and the prospects of monetary policy, it is more important to focus on the medium-term view on price and economic activity trends with account of sustainable factors. The economy will be returning to its potential progressively, and therefore disinflationary trends will prevail.
We have adjusted our assumptions of the annual GDP change only slightly, taking into account the influence of divergent factors.
On the one hand, this is a deeper decline in economic activity and in domestic and external demand in the second quarter, which resulted from the longer duration of the restrictions both in Russia and abroad than we had expected in April. According to our estimate, the GDP decrease in the second quarter equals
On the other hand, we have observed a substantial expansion of the budget-funded and other measures supporting the economy, compared to April, which is partially offsetting the decline in incomes, sustaining consumption and investment, and boosting a faster economic rebound. In the updated forecast, we have reflected that fiscal stimulus has increased nearly twice compared to the measures that had been in place when April’s forecast estimates were made. Moreover, economic recovery will also be promoted by the easing of monetary conditions owing to the significant reduction in the key rate.
Taking into account these factors, according to our forecast, GDP will decline by
Although we forecast significant recovery growth in 2021, economic activity will remain considerably below its 2019 level and below the potential. This implies that the restraining effect of aggregate demand on consumer price trends will persist in the next year. The reduced current monthly rates of price growth will remain at this level until the end of the year. Inflation will be returning to the 4% target gradually since it will take time for demand to recover, including owing to the easing of monetary policy. We forecast that annual inflation will range from 3.5% to 4.0% in 2021 and will stabilise close to 4% in 2022.
I would like to remind you that inflation is expected to reach
The reduction in the key rate since April is contributing to the further easing of monetary conditions. Interest rates in the banking sector are decreasing. However, we take into account that there are factors that may be restraining this process. These factors include increased credit risks and the resulting tightening of requirements for borrowers, as well as external factors that may cause risk premium fluctuations. Furthermore, we take into consideration that the regulatory easing and preferential lending programmes are also contributing to the easing of monetary conditions today.
Interest rates on deposits exceed the forecast inflation. Ruble-denominated household deposits keep growing. In June, their annual growth rate was 10.9%.
The easing of monetary conditions driven by the actual key rate reduction will support credit growth already this year. We estimate that the credit to the economy will expand by
When making our decision to cut the key rate, we also take into account the announced plans with regard to the fiscal policy, including the forthcoming budget consolidation in
Regarding the balance of payments, in
The increase in the expected negative balance of the financial account of the private sector is mainly related to the current account forecast revision. The forecast of the balance of payments also takes into account the plans of the Minfin to increase borrowing this year. Compared to the April forecast, we expect a less significant decline in foreign currency reserves in
The forecast of operations under the fiscal rule includes the completion of sale of foreign currency related to the deal with Sberbank shares. The mechanism, under which we sell this currency only if the price of Urals oil is below $25, expires on 30 September. If the current situation in the global oil market remains in August — September, we are planning to offset the balance of unsold foreign currency related to Sberbank shares with the amounts of purchases postponed since 2018 and pre-emptive sales that we conducted in March—April. The net balance is 185 billion rubles in the ruble equivalent. This amount of foreign currency will be evenly sold in addition to regular fiscal rule-based operations over the course of the fourth quarter of 2020.
Speaking about forecast risk factors, uncertainty remains high, both in terms of the nature of the slowdown and recovery processes in the Russian and global economies and in terms of the scale of the effect that the pandemic and restrictive measures could have on the economic growth potential in Russia and abroad. This concerns both the production recovery potential and possible changes in households’ consumer and saving preferences. These factors, in turn, can have a considerable effect on the inflation forecast.
Uncertainty caused by external conditions is further exacerbated by increased tensions between the US and China, which creates risks to both global economic growth and the dynamics of global commodity and financial markets. There remain risks on the part of other geopolitical factors as well.
Besides, at the current stage, with the restrictions still in place, it is difficult to unambiguously estimate how quickly and widely the key rate reduction will translate into the easing of monetary conditions and further on, into the dynamics of economic activity and inflation. As we have noted earlier, in the near future they will be influenced by a wide range of diverse factors.
I would like to point out that at our today's meeting we have returned to our standard key rate change pace, considering that finer tuning of the monetary policy within the baseline forecast is necessary now, as compared to the previous months, when a decisive reaction of the monetary policy to shocks was justified. In the future, we will estimate the nature of changes in monetary conditions, recovery processes in the economy and price dynamics and, based on these factors, consider the necessity to cut the key rate at the upcoming meetings. In general, we believe that there may still be room for monetary policy easing.
When making our key rate decision, we also discussed the neutral key rate range. At the current stage, we have reviewed our real neutral key rate range downwards to
In conclusion, let me reiterate that we make our monetary policy decisions primarily based on our objective to stabilise inflation close to the 4% target.