Talking points for Alexey Zabotkin’s press conference on draft Monetary Policy Guidelines for 2021–2023
Today, we have published the draft Monetary Policy Guidelines for
The Guidelines stipulate our approaches to monetary policy. In this document, we also give our outlook for the future and our opinion as to how we are planning to achieve our inflation target with account of the current changes in the Russian and global economies and in the financial system.
This year, we have been observing drastic changes in the economic environment. The coronavirus pandemic has entailed a development of events that totally differs from the baseline scenario we presented in the Guidelines last year.
However, despite all the changes in the economic conditions, the Bank of Russia’s monetary policy goals and principles remain unchanged. We are consistently pursuing inflation targeting policy aimed at keeping annual inflation close to 4% on a continuous basis.
Over the last three years, from August 2017 to August 2020, annual inflation averaged 3.4%.
This year’s experience has proved that our policy is efficient during both calm and turbulent periods. Beginning from March, or even
A drastic rise in uncertainty triggered a surge in volatility in financial markets. In the oil market, these negative factors were amplified by expanding supply after the OPEC+ arrangements had expired in March.
In these rather challenging conditions, the Bank of Russia managed to pursue countercyclical policy, in contrast to the crises of
In contrast to fiscal policy, the effect of monetary policy on the economy and inflation has significant time lags. It takes from three to six quarters for the Bank of Russia’s decision on a key rate change to fully transmit into decisions on consumption, investment, saving and lending made by households, businesses and banks.
This is why, during the acute phase of the coronavirus pandemic in spring and summer, the stabilisation measures implemented by the Government to support households and businesses and the regulatory easing by the Bank of Russia were of utmost importance. Now, monetary policy will compensate for the gradual termination of these measures. And further on, the impact of the decisions on the key rate reduction will increase, manifesting itself in the coming months and quarters. Taking into account the above-mentioned monetary policy lags, we will observe the effects on monetary conditions stemming not only from this year’s monetary easing, but also from the key rate cuts in 2019. Let me remind you that, since the beginning of the year, the decrease in the key rate totalled 200 basis points, and from June 2019 — 350 basis points. Overall, the key rate was cut from 7.75% to 4.25% per annum.
It is definitely necessary to stress once again the role of the fiscal rule mechanism which has proved to be efficient as an ‘automatic stabiliser’ helping smooth out the consequences of fluctuations in the global hydrocarbon market for the economy.
The coordination of the Government’s and the Bank of Russia’s efforts and the understanding of the capacities and limits of each other’s instruments are an essential prerequisite for the successful implementation of macroeconomic policy, driving the economy back to the sustainable growth path and its potential, and maintaining inflation at the target.
Unfortunately, this year’s events not only materially complicated the conditions for pursuing monetary policy in 2020, but also significantly increased uncertainty over economic developments in the coming years. Moreover, this uncertainty is related to both aggregate demand trends and the aftermath of the pandemic for supply-side factors determining the potential of both the Russian and global economies.
In these circumstances, we have developed more forecast scenarios for the Guidelines. I would like to point out that if in the previous years the price of oil was the key assumption, today the situation has changed. On the one hand, owing to the policy pursued by the Government (the fiscal rule) and the Bank of Russia (inflation targeting and a floating exchange rate), the economy’s dependence on oil has decreased. During the acute stage of the pandemic, we saw how these instruments enable us to soften the external shock that is not necessarily related to oil.
On the other hand, the nature of this uncertainty also differs from the previous years. Uncertainty regarding demand is associated with possible shifts in both consumers’ behaviour and in companies’ investment demand due to financial losses they have faced and a less predictable future.
Uncertainty about the economic potential and supply-side factors is rooted in changes in production costs, a decrease in output caused by the new sanitary and epidemiological rules, adjustments in production chains needed to be secured against possible new restrictions, and a rise in debt burden. Another factor that may adversely affect the global economy’s potential is trade tensions that have been increasing again lately, after a certain pause.
The forecast scenarios analysed in the Guidelines reflect this two-way nature of the uncertainty. They vary in the assumptions with respect to the dynamics of recovery of aggregate demand and with respect to shifts in the path of potential GDP. We have four scenarios: a baseline one and three alternatives.
The baseline scenario of the Bank of Russia’s forecast was presented in July. In the Guidelines, we have extended it to 2023. It is based on a relatively rapid recovery of private demand, budget consolidation with the federal budget returning to the fiscal rule parameters in 2022, and quite moderate consequences of the pandemic for the potential. The baseline scenario presumes that an accommodative monetary policy will likely remain in place in 2021, with a gradual return to a neutral monetary policy in the second half of the forecast period as inflation stabilises at the target level.
The disinflationary scenario can materialise if the pandemic continues and restrictive measures remain in place. It presumes a significantly slower recovery of demand, income and investment activity with a steady decline in propensity to consume and longer monetary policy transmission lags. The worsening of economic expectations can cause a new surge of volatility in financial markets. However, after that, a long period of contained demand will cause inflation to sustainably deviate downwards from the target, which will require an even longer, and perhaps more pronounced, accommodative monetary policy to bring inflation back to the target.
The pro-inflationary scenario is based on the dynamics of demand similar to that forecast in the baseline scenario; however, the drop of the economy’s potential here is significant. It also contains a demonstrative assumption that budget consolidation takes longer and is extended until 2023. In these circumstances, the economy returns to this lower potential already in 2021 and even slightly exceeds it. To keep inflation at the target level of 4%, the Bank of Russia might need to temporarily shift to a moderately tight monetary policy with a subsequent return to a neutral policy by the end of the forecast period.
And finally, the risk scenario combines a weak recovery of demand and a significant drop of potential. This scenario is additionally worsened by a likelihood of a large-scale credit crunch in countries with high public debt as well as by increased geopolitical risks. As a result, in 2021, risk premiums in global financial markets will rise for a long period of time, and capital outflow will increase. Strong pro-inflationary risks will require a temporary considerable tightening of monetary policy, with a subsequent return to an accommodative monetary policy in the second half of the forecast period. Due to the large scale of the shock, inflation will stabilise at the target level slightly later than 2023. It should be noted that the inflation range in the risk scenario is narrower than last year. This is related to more stable dynamics of inflation expectations, which we are observing in 2020 and tend to extrapolate into the future.
Once again, I shall reiterate that the current conditions and the nature of uncertainty around future economy dynamics are quite unusual. In these circumstances, clear communication policy and transparency of the central bank are becoming even more important. In order to respond to the challenges we are facing, we are taking a number of new measures.
First, as you know, this year we have switched to holding press conferences of the Governor after each key rate meeting. We believe that this widespread practice is very important to clarify both key rate decisions themselves and the evolution of the Board of Directors' assessment of the economic situation.
Second, economic dynamics are showing increased inconsistency. This makes receiving information about the local situation in Russian regions even more important. Already in September, we are starting to publish information and analytical commentaries on inflation in every Russian region. This will enable people to learn about the specifics of price movements in their regions. In the first quarter of 2021, we are planning to start publishing a consolidated review of materials provided by the Bank of Russia main branches on the current economic situation in Russian regions.
Finally, next year, we are planning to start publishing our forecast in a more detailed format, which will perhaps also include the forecast key rate path.
In conclusion, I would like once again to express my opinion that the Russian economy has faced the pandemic with a much greater resilience reserve than ever and with a macroeconomic policy that is up to the challenges. After the shocks of
Taken together, all these factors create a foundation for steady growth, as well as a predictable environment for households and businesses.
Thank you for your time. I will be happy to answer your questions.
Q&A for the Media
Does the August inflation rate of 3.6% correspond to the expectations of the Central Bank, or does it exceed the estimates? How will the absence of distinct general deflation in August impact the Central Bank’s annual forecast? Do you expect deflation in September?
Let me remind you, as usual, that we do not make monthly inflation forecasts. Actual inflation in August was really about 0.1 pp higher than the consensus forecast and estimates based on the weekly price growth rates. Therefore, we expect that, with regard to these data, inflation will probably lie at year-end in the middle of the range that we defined in the July forecast—from 3.7 to 4.2%.
Two short clarifications and a question. First of all, when in 2021 will it be possible to publish the rate path? At the beginning or middle of the year?
Am I right that in the baseline scenario a shift to neutral monetary policy is possible, as you said, ‘in the second half of the projection period’, that is, no earlier than the middle of 2022?
And the third, additional, question. The Federal Reserve System, in particular, allows an overshoot of the inflation target, and it shows more tolerance in this regard. May the Central Bank be also more tolerant of an overshoot of the target?
Concerning the forecast publication, I would like to highlight that internal discussions about the update to the forecast presentation format are still ongoing. We have made good progress with them, but they remain to be finalised. Therefore, we probably cannot give more precise dates. We expect that it may occur next year or, basically, before the end of this year. However, we do not offer any serious commitments in this regard.
Concerning the key rate path in the baseline scenario. Policy normalisation, that is, a return to the neutral rate, will be driven by a set of future conditions. We assume that the return to neutral policy will occur in the second half of the projection period. This means that, by the end of the projection period, the policy will be neutral. However, the exact moment when this process will to a great extent start depends on incoming data.
And the third question about the Federal Reserve policy, that the Federal Reserve will actually try to ensure that inflation is somewhat higher than the long-term target of 2%, and for a long time, based on the communications delivered by Federal Reserve representatives during the last several weeks. For us that is probably not yet relevant.
In your Guidelines, you pay a lot of attention to potential output. Your earlier estimate of the growth potential of the Russian economy was
Second question. You write that the change of foreign currency reserves reflects gold purchases by the Bank of Russia. Does this mean that the Bank of Russia will resume gold purchase operations suspended since 1 April? If so, when? For what time period? And the third question. You have already made it clear that you wish to start the publication of the key rate path. What has changed? Have you found a format that makes it possible to do so? Just a while ago, the Governor took a very careful attitude towards that possibility.
Speaking about potential. Uncertainty about economic potential relates not only and not so much to potential growth rates, but to the potential GDP level, which may be affected again by structural changes in supply factors connected to the consequences of the pandemic, which I have already mentioned in my speech.
Baseline scenario growth rates and potential growth rates remain the same, at
Concerning gold purchase forecasts. It is necessary to bear in mind that this is not the Bank of Russia’s forecast. We are setting a baseline that, in fact, extrapolates the average values of past years. As you know, we do not make any forward-looking statements concerning operations with foreign currency reserves. When and if a decision to resume gold purchases is made, the Bank of Russia will additionally inform about it.
As for the rate path. I would like to highlight that the issue is not only in the rate path, but a more detailed and extensive presentation of the forecast in general. Yes, we have been holding such discussions for some time, more than a year. We have made good progress in these discussions. But I am probably not ready to go into detail now. By July, we had realised that we were close to implementing that initiative in some form.
In terms of what has changed, we considered quite a few different variations and apparently discovered a solution that would enable us to fully enough explain to our audience, to different audiences, the various views on the forecast that arise during the discussion and preparation of a key rate decision. This is also associated with the fact that, probably, the importance of the need to communicate the rate path at the moment and for a more detailed disclosure of the current forecast has increased due to higher uncertainty and the need for a more detailed communication of the decision-making logic.
QUESTION (RIA Novosti):
What formats for the publication of the key rate is the Central Bank considering now?
The discussion includes all approaches used by other central banks: those based on radial diagrams, scenario analysis, and approaches that may be roughly called analogues of the dot plot of the Federal Reserve. I am not ready to declare at this point in time what decision will finally be made.
Rossiiskaya Gazeta’s QUESTION:
When, and under what conditions, might the Bank of Russia return to a complete cycle of monetary tightening?
The Bank of Russia will return to neutral policy monetary policy when it is sure enough that inflation will stabilise at 4%, that is, at our target, and will further stay at that level.
QUESTION (Kommersant paper):
What factors, in your opinion, have played the central role in the reduction of the neutral key rate range estimated by the Central Bank? What is, according to the estimates of the Central Bank, the long-term behaviour of the neutral rate for the Russian Federation—will it increase, decrease, or remain stable?
The factors impacting this decision are given in the neutral rate box in the Guidelines. A very significant consideration was the reduction of global estimates of the neutral rate. As well as, probably, the lower estimate of the sovereign risk premium for Russia, the consistently lower sovereign risk premium for Russia. And those factors together provided about 100 basis points of the interval revision. Probably, those two factors had approximately equal roles.
In terms of further trends of neutral rate estimates, these estimates will be revised based on how the economy evolves. We have emphasised many times that neutral rate estimates are very rough, even for economies with a significantly longer history of inflation targeting and sustainable price growth than Russia. Therefore, to obtain reliable evidence of the level of interest rates at which we really ensure steady 4% inflation, additional time will certainly be required. We will revise the estimate, if needed, based on incoming data.
QUESTION (Expert Sibir magazine, Novosibirsk):
When identifying the vector of the 2020 monetary policy, it was probably difficult to envisage the pandemic and its rather serious economic consequences.
How efficient were Bank of Russia instruments in that situation, in terms of aligning the monetary policy stance? Can extraordinary risks like the coronavirus pandemic be envisaged when preparing the Monetary Policy Guidelines in
To first part of the question, how efficient Bank of Russia instruments were. As far as we can see, the effects of the inflationary spike in March and April have exhausted themselves rather quickly. Data for the last months show that the seasonally adjusted price growth rate is close to, or even under, 4%.
We will keep monitoring. As I have already said, monetary policy lags are very significant, and it is therefore possible to fully assess its efficiency only after a considerable period of time. However, so far, we believe that inflation targeting, the key component of monetary policy, has successfully passed the test of 2020.
Can such extraordinary risks be envisaged when preparing the Guidelines for
QUESTION (Fomag.ru magazine):
Recently, oil and the ruble have significantly lost ground. How dangerous is this situation for the Russian economy, or is it not as serious as it might appear at first glance?
Indeed, fluctuations in the oil market have slightly intensified recently. Now, the price of oil is about 40 dollars a barrel. This approximately corresponds to the June levels. We are still far from the minimum values that the market showed between April and the beginning of May. Let me remind you that even under those conditions, financial stability was ensured and the passthrough of the external shock into inflation was fairly low-key.
In terms of exchange rate fluctuations, the rate is floating; now it continues to fluctuate in the range that we have observed over the last six months. In general, the cumulative weakening of the ruble over the last 12 months does not differ from, or probably is even slightly less than, the weakening of 2018; therefore, again, we do not see any special consequences from this weakening for the economy or the financial system. Although, we certainly consider the dynamics of the exchange rate, since there is a certain passthrough of its dynamics into short-term inflation.
QUESTION from Izvestia:
The Monetary Policy Guidelines for the next three years mention an asymmetric impact of the ruble exchange rate on inflation. Now we are seeing a weakening, and in this case the impact is stronger. Is there an estimate for that impact?
This is an issue that we comment on in detail rather often. Moreover, there is also the box in the Monetary Policy Guidelines. There are more large-scale studies on the passthrough effect that you may find on the Bank of Russia website. In general, the passthrough upon exchange rate weakening is, according to our estimates, lower than 0.1, that is, less than 1% inflation in the case of a 10% weakening of the ruble. The passthrough has declined over the past years, and now, with low-key exchange rate movements, it is on the order of
You said that the policy would remain loose for a rather long time. I wonder, when it is loose, could the rate rise? Basically, if inflation rises, the policy could remain loose, even subject to the rate increase.
The second part of the question relates to the near future. As far as I know, tomorrow is the start of the week of silence. Can you already see the balance of risks? Maybe, you would like to give us some signal?
The first part of the question is really very important, as the looseness or tightness of monetary policy is essentially about the level, as you correctly mentioned, the level of the rate in relation to the neutral one. However, tightening or easing of monetary policy is about the change of the rate over time. It is true that before the policy becomes neutral, there will be a period when it will be tightened, while still remaining loose. How and when this will happen, as I have already answered one of the previous questions, will depend on the situation, the interaction of supply and demand factors, the recovery of demand, and potential behaviour within the two-dimensional global picture that we try to communicate in the Guidelines.
The second, inevitable, in my understanding, question is about the decision we are to make next Friday. Our message in this regard was laid out in the Governor’s speech on Tuesday. The Board of Directors will assess the necessity of a further rate reduction. For that purpose, it will also assess both the time limits and the necessity to use a monetary policy easing room that we still see within the framework of the baseline scenario. However, with regard again to both incoming inflation data and slightly increased volatility in external markets, we will certainly weigh all factors and select the rate path based on the goal of keeping inflation close to 4%.
QUESTION (Izvestia paper, Republic of Udmurtia):
When the key rate decreases, deposits become less attractive. However, the funds of depositors are the foundation of the resource base of commercial banks. As depositors are important to banks, banks are keeping deposit terms at an acceptable level, but consumer loan rates also remain high. This raises the question: what are the efficiency limits of monetary policy, and how close is the current rate level to the equilibrium value?
That question really is very important and relates simultaneously to several conceptual aspects of the implementation of monetary policy. Let me start from the end of the question. The equilibrium (long-term) value of the rate is the neutral rate.
If inflation targeting achieves its goal and brings inflation back to 4% in the medium-term, then we will finally return after the period of loose monetary policy to the neutral rate, which is now estimated by the Board of Directors as
And the first part of the question is actually connected to this aspect. Deposit rates depend not just on the key rate, but also on the maturity of those deposits. If we have a look now at the structure of interest rates in the OFZ market, we will see that they have an ascending structure. Long-term yield of OFZ exceeds their short-term yield. This is connected to the fact that the market has a rational expectation that the key rate and short-term rates will eventually return to their long-term equilibrium. Under such conditions, the attractiveness of deposits will be ensured by the ascending slope of the curve. Moreover, this increases the relative attractiveness of longer-term deposits as compared to short-term ones and must lead to the expansion of the supply of long-term savings, or long-term money for financing investment projects.
QUESTION (Bankiros.ru portal, Nizhny Novgorod):
During the pandemic the number of over-indebted borrowers and bad debts increased. Does this mean that, despite the key rate reduction, we will have to wait for a long time for low-interest loans, as in Europe?
Frankly speaking, the levels of the key rate and the loan interest rate are indirectly connected to the level of bad debts. Yes, in the context of an economic slowdown and reduced income, banks will certainly experience some deterioration in the condition of their portfolio, including unsecured loans.
However, it is important to remind you that over the last few years, the Central Bank has consistently implemented a policy of creating macroprudential capital buffers, requiring banks to assign higher risk weights to certain loan categories, in particular, to riskier unsecured loans. Now, banks can absorb the increase of bad loans and bad debts thanks to the buffers they created. Therefore, the deterioration in the credit quality of the portfolio will have a significantly lower impact on the lending activity of banks than it had during the crisis of
Coming back to the level of key rates and unsecured loan rates, it must be admitted that both in Europe and the United States the target inflation level is lower, and the rate is already at zero, due to the fact that the economy is really facing great and deep problems, a deeper fall in the economy than the one that happened in our country, according to Q2 results. Under these conditions, central banks are certainly forced to implement a much looser monetary policy, since their disinflationary risks are much higher than ours.
The Governor said yesterday that Russian economic growth potential may have been affected by pandemic-induced structural shifts. What preliminary estimates does the Central Bank have?
I have already answered a similar question. In the context of potential GDP growth in the baseline scenario, we think that potential growth rates remain that same as before the pandemic, that is
Earlier, you said that Russia’s Q3 GDP would be in positive territory on a quarter-on-quarter basis. What is the Central Bank forecast?
The Central Bank forecast for the third quarter and for the year will be updated in the October forecasting round. In my opinion, we have not made any announcements in regard to the third quarter, but, indeed, there is still greater confidence that, in terms of consistent growth, that is, on a seasonally adjusted basis, the third quarter, as compared to the second quarter, will show significantly positive dynamics, despite the ongoing OPEC+ restrictions.
I have two questions. The first is connected to the upcoming meeting of the Board of Directors on the key rate. Can you tell us, with regard to all your statements, what is the probability of a pause at this meeting of the Board of Directors? And with regard to your statements that the potential for a rate reduction is almost exhausted, if the Board is nevertheless considering the rate reduction option, could the option of 50 basis points be considered, or is it just a small step of 25 basis points?
And the second question, my colleagues have already asked about the ruble exchange rate, and you said that you saw no special consequences from its weakening in August and September for the economy, but anyway, have you assessed how much the balance of inflationary risks has changed? Have proinflationary risks increased, or have disinflationary risks declined?
As for the upcoming meeting in terms of probability, as you know, we do not discuss this, or its results, before the meeting. I think that the Board of Directors will consider various alternatives of both the decision and its accompanying signal. Generally, in the context of some room for a further key rate reduction, I would like to highlight that, based on the results of the July meeting, the Board of Directors believed that there still was the potential to ease monetary policy in the baseline scenario.
At the moment, we believe that we must be very careful in approaching the question of how to use this potential, and whether it should be used, but basically the room still remains.
As for the second question, regarding the balance of proinflationary and disinflationary risks, the opinion for 2021 is that the balance of risks is still shifted towards disinflation. Disinflationary risks prevail, but we can see that current inflation is slowing down at a lower rate than expected, that is, the realisation of these disinflationary risks is shifting a little bit to the right in the short term, but the general opinion for next year is that disinflationary risks prevail.
Are foreign exchange sales in the amount of 185 billion rubles due to start on 1 October?
Yes, the information provided in July has not changed. Indeed, ‘netting’ sales remaining as a result of the offset of 2018 delayed purchases and foreign exchange sales related to the transaction with Sberbank shares, as well as additional operations conducted in March and April, will make up 185 billion rubles. We will sell the corresponding amount of foreign exchange in equal shares from 1 October to 31 December of this year.
How do you explain the reduction in non-resident participation in OFZ auctions? Is the Central Bank anxious about this trend? If the reduction continues, how could it impact the market?
There are various explanations. If we look at the participation of foreign investors and flows of portfolio investments in the debt markets of various emerging markets, we can see that the flows have decreased in recent months. This is apparently associated with moderate risk appetite after its initial recovery in May and June. This does not spark concern, because we see that auctions are conducted and have a fairy good, I would even say, record scope, as there is demand for public debt from Russian investors.
QUESTION (UralBusinessConsulting information analysis agency, Yekaterinburg):
How dangerous is excessive ruble weakening or strengthening against major currencies—the dollar and euro? How is the Bank of Russia going to maintain this balance while supporting, at the same time, the investment attractiveness of the Russian currency for global players?
Let me reiterate that since late 2014 we have had a fully floating ruble exchange rate, therefore its dynamics depend on a lot of factors. Moreover, it is important to note that exchange rate fluctuations are a very important safeguard that makes it possible to limit the impact of changing external conditions on the Russian economy. That is actually the main reason why we decided to shift to a floating exchange rate. During the last 6 years, the implementation of this policy has shown quite good results. Certainly, if currency fluctuations become dangerous to financial stability, the Central Bank reserves the right to limit such fluctuations with financial stability instruments.
But in general, the rate is floating. We consider its dynamics when preparing our opinion on monetary policy and selecting the key rate path.
Does the Bank of Russia include in its
I would say that, in the baseline scenario, a change in the sanctions regime is not a part of the assumptions. The risk scenario includes an aggravation of geopolitical risks, with a possible tightening of the sanctions regime, and therefore additional subsequent capital outflow.
During the week, there were serious calls for the introduction of a universal basic income in Russia, with statements by Dmitry Medvedev and some senators. How would this step, if any, impact inflation and monetary policy?
We certainly, to a large extent, consider the fiscal policy of the Russian Government when preparing our forecast and making monetary policy decisions. However, we do not take into account decisions that are theoretical and under discussion, but only those that have already been made. Therefore, that question could probably be answered when and if the relevant decision is made.
QUESTION (Komsomolskaya Pravda paper):
What is the sense in reducing the key rate if it does not lead to the reduction of real interest rates, in particular unsecured consumer loan interest rates? As a result, the banks gain excess profit, deposit interest rates decrease, while loan interest rates remain high.
Unsecured consumer loans are not the only loans in the economy, and loans in general do not represent the whole supply of credit resources available in the economy. There are other segments of the financial system. For example, the quickly expanding bond market and other parts of the capital market. But that is only a remark.
Let me disagree with the statement that a key rate reduction does not lead to a reduction of real interest rates. We can see that, from the beginning of this year, rates in both individual lending, in particular mortgage lending (unsecured consumer loan rates have also slightly decreased), and business lending have significantly decreased. As our 4% inflation target is permanent, a reduction of nominal rates directly reduces real rates, especially in the case of significantly short-term loans.
Thank you very much for your time and very appropriate and important questions! I hope you will be able to familiarise yourselves with the details of the Monetary Policy Guidelines in the upcoming days and weeks, and we can make additional comments and give explanations when reviewing the Draft Monetary Policy Guidelines in the State Duma.