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Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 13 September 2024

13 сентября 2024 года
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Good afternoon,

Today, we have made the decision to raise the key rate to 19% per annum.

As a result of our earlier decisions, monetary conditions have continued to tighten in recent months. The expansion of lending has slowed down somewhat, primarily in the retail segment. However, inflationary pressures have not been easing. Underlying inflation is still higher than the rate needed for returning to the target next year. Today’s monetary policy decision will give a stronger impetus to a decline in inflation. We hold open the prospect of increasing the key rate further at our next meeting.

I would now dwell on the reasons behind our today’s decision.

Firstly, as regards inflation.

Price pressures remain high due to both underlying and volatile components. Most measures of underlying inflation are still in the range of 6.0–8.0%, which is intolerably high.

As to volatile components, the most significant pressure has been exerted by fruit and vegetables as their prices were falling this summer to a lesser extent than usual. Moreover, at the end of summer and in early September, some important visible items frequently purchased by households, in particular petrol and dairy products, were becoming increasingly more expensive. This might be fuelling inflation expectations even more.

Taking into account recent data, we expect that inflation is likely to exceed the July forecast of 6.5–7.0%. We will adjust this forecast at the core meeting in October. 

Tight monetary conditions are facilitating the deceleration of inflation. As a result of our earlier decisions, the expansion of retail lending and the part of corporate credit that is less tied to government demand has slowed down. We are confident that inflation will be decelerating. However, as for now, the current monetary policy has not yet become sufficiently restrictive to bring inflation back to the target next year. What are we concerned about?

In the first place, our concerns are associated with inflation expectations as they have been rising among households for the fourth consecutive month. Businesses’ price expectations have increased as well, especially in retail. According to our survey, analysts have shifted the period of achieving the inflation target to 2026. This growth of inflation expectations makes it more difficult to give rise to a disinflation trend.

Our second concern is that the economic growth is unbalanced. In other words, the dynamics of demand does not correspond to the capabilities to expand the supply of goods and services. This is in particular what elevated inflation signals.

Hence, let us take a closer look at the economic situation, specifically what is limiting supply and spurring demand.

The labour market is still the main supply-side constraint hindering the increase in output. The unemployment rate has dropped to a new historical low again. According to surveys, the share of businesses suffering from staff shortages has remained high. Indeed, we can observe that the rise in wages has slowed down somewhat in recent months. However, it is still faster than the growth in labour productivity. The slower growth of wages does not mean that labour shortages have eased as companies’ staff costs have been rising, although in other forms. As reported by our regional divisions, enterprises have been hiring employees from other regions increasingly frequently, covering their expenses on accommodation and transport. Moreover, many businesses have been expanding their social packages.

Problems in logistics and cross-border settlements caused by sanctions have also been limiting the supply of goods and services in the domestic market. Moreover, amid the weak external demand, oil companies have reduced output pursuant to the OPEC+ agreement.

Now, I am going to speak of domestic demand. Although the increase in consumer and investment activity has slowed down, it remains high overall.

In September, the Present Situation Index of the Business Climate Index turned negative for the first time this year. This is one of the signs of a deceleration of economic activity. Nevertheless, it is worth noting that expectations expressed in the course of the survey suggest that companies remain very optimistic about the future. In other words, businesses might consider the current cooling of demand as temporary.

The key question is what caused a slowdown in economic growth: was it driven mainly by the cooling of demand or by supply shocks? If we find out that this was primarily driven by supply shocks, especially long-lasting ones, this will mean that monetary conditions should be tighter. We will need to further adjust demand to the limited capabilities to expand the supply of goods and services.

Since our previous meeting, monetary conditions have been tightening further.

The financial market has responded to the July revision of the key rate path. Yields on short-term federal government bonds have risen more than those on medium-term bonds, whereas yields on long-term bonds have declined. This suggests that market participants have lowered their long-term inflation expectations.

The credit market has also responded to our previous decision. The expansion of lending has slowed down most notably in the retail segment. Alongside the key rate, it has been influenced by other factors, in particular, by changes in the terms of subsidised mortgage programmes and the tightening of macroprudential policy. Corporate lending currently continues to expand fast. As a result, in July—August, the growth rate of the overall loan portfolio has not changed significantly.

The situation where the dynamics are uneven across the lending segments is normal. We do not expect the key rate to have the same effect on all market segments. It is important that in order to reduce inflation, the growth rate of overall lending should be more moderate.

Now, I would like to speak of external conditions.

The expansion of the world economy has been slowing down, which is generally in line with our forecast. This process is especially evident in the industrial sector, while the services sector demonstrates better dynamics. Overall, the structure of global demand is becoming less energy-intensive, which might restrain the demand for Russian export goods.

The current decline in crude prices is related to both the structure of the global economic growth and expectations of its further slowdown. These trends in the oil market are proinflationary for Russia.

Lower prices for the main Russian export goods have entailed a slight contraction of exports in July and August. Concurrently, imports have remained at the same level, therefore, the balance of foreign trade has shrunk. Importers are still experiencing problems with cross-border settlements. Alongside the key rate, these difficulties might be limiting the growth rate of imports amid high domestic demand. 

I would now dwell on the risks to the baseline forecast.

The main internal risk is the full utilisation of available production capacities and labour force. In this situation, any further stimulation of demand will only be causing price increases without growth in output.

Moreover, there are still risks associated with inflation expectations that might get entrenched at a high level for a long period.

Finally, another proinflationary risk is a possible rise in geopolitical pressure and a more notable deceleration in major economies. This might entail a decline in the demand for commodities, which will in turn exert pressure on Russian exports and, consequently, on the ruble exchange rate.

An essential factor in our decision-making is fiscal policy. Changes in the structure and amount of budget revenues and expenditures, the budget deficit, and the pace of fiscal policy normalisation have a strong influence on demand and, accordingly, our decisions. We will take into account the three-year budget configuration when updating our forecast in October.

There are also disinflationary factors that might materialise over the forecast horizon. In the first place, this is a faster reduction in demand and a more considerable increase in the economy’s potential and labour productivity. 

Winding up, I would like to comment on the future path of the key rate.

We consider it necessary to return inflation to 4% next year. To ensure this, we are ready to maintain tight monetary conditions for as long as needed. We are also ready to raise the key rate further.

Why is it critical to return to 4% instead of putting up with 6–8%? First and foremost, this is essential to guarantee the protection of households’ savings and incomes against depreciation. The second reason is that long-term loans are affordable only when inflation is low. When inflation is high, such loans, including mortgages, are expensive for most borrowers as their cost includes the inflation component. Third, when inflation is notably higher than in trading partner countries, the ruble is constantly weakening. Fourth, high inflation makes prices more volatile. The higher inflation is, the more difficult it is to control it. If we put up with the price growth rates of 6.0–8.0%, the risks of moving to double-digit inflation will soar. In this case, regaining control over inflation would become much more difficult and expensive for society. Hence, the Bank of Russia will be doing its best to reduce inflation to 4% next year.   

Thank you for your attention.

Q&A for the Media

QUESTION from TASS:

I have several questions. The first is about the options you considered today. Did you discuss the option of keeping the rate unchanged?

The second is about the Ministry of Economic Development’s latest macro forecast. The projected GDP growth for 2025–2027 paints a more optimistic picture than your current projections. How realistic are their projections, in your opinion?

ELVIRA NABIULLINA:

Three options were on the table: keeping the rate unchanged, increasing it to 19%, and increasing it to 20%. Our detailed discussion was centred on a 19–20% increase, following the release of inflation data in August. What we really focused on was essentially the size of increase.

While on the forecast, our baseline forecasts are indeed different. We are guided by our baseline forecast when we make our decisions. However, I should say that the Ministry of Economic Development's forecast is closer to what we call a disinflationary scenario. There are four scenarios in the Monetary Policy Guidelines, and the Ministry of Economic Development’s scenario is similar to our disinflationary scenario. And there is a certain likelihood of such a scenario. However, we believe that monetary policy should be based on more conservative assumptions.

QUESTION from Bitkogan project:

It is clear that the high key rate has not brought grave problems to the Russian economy. Is the Bank of Russia concerned that a sustained period of high key rates may build up accumulative negative effects and an uptick in bankruptcies? In particular, are defaults on floaters of concern to the Bank of Russia?

ELVIRA NABIULLINA:

We are watching the implications of our monetary policy for financial stability and the ‘health’ of borrowers. Importantly, we do not see stability risks for most borrowers. There will always be overindebted borrowers who have accumulated liabilities. A rise in the key rate may bring serious problems to them, especially in the case of floating-rate loans. However, most borrowers are in a fairly stable position. Moreover, companies in the real sector have turned in solid financial performance over recent years, enabling them to build a safety cushion.

The quality of loans to non-financial entities is good. Non-performing loans account for a mere 5%, and that is a fairly steady share of the total portfolio.

Speaking of the risks of floating-rate loans, their share is indeed up. Many companies took floating-rate loans in the expectation of a decline in the rate coming soon. The thinking was that the high rates were not for long and that the rate would be low again. The banks extended such loans, passing the interest risk on to the borrowers. Having said that, many banks do not manage their interest rate risk simply by passing it on to borrowers. Their pricing also includes the risk that interest rate risk becomes credit risk associated with loan servicing. We are therefore also closely monitoring trends here, but there is no cause for alarm at the moment. Loans are indeed being serviced well, and there is a safety cushion, so the banks are broadly managing the risks.

QUESTION from InvestFuture project:

The Russian stock market has lost 25% since the spring. Is this a worrying sign for the Bank of Russia? The stock market is normally viewed as an indicator of economic sentiment, and this decline is in many ways due to the monetary tightness. The market also broadly attributes the decline to the recently closed loophole for the external transfer of assets. This loophole closed on 24 August. What is the Bank of Russia’s view of the pressure this factor exerts on the market? How long might it last?

Question two, please. The President recently said that the fight against inflation must be first of all based on the supply of goods and services. For all the intense lending, supply has remained scarce on the back of payment problems. What is the present contribution of the supply-side problems to inflation? Which is the stronger driver of price growth: high demand or low supply?

ELVIRA NABIULLINA:

While on the stock market, in our view, there have been several factors at play simultaneously. As regards the one you mention, the closure of loopholes to bypass counter-sanctions and transfer securities from abroad, we believe it to have had only a minor impact on the trajectory of the stock market. Other factors were more impactful. Among them is monetary policy tightening. Also, other financial instruments, including money market instruments, have gained in popularity. Furthermore, we can see that investors are adjusting their expectations regarding the future financial results of companies. There are several reasons behind this, including the tightening of monetary policy, the projected impact of tax changes and external market conditions. A further factor could be the change in share prices resulting from dividend decisions. We see a number of concurrent factors at play, and we expect fairly steady development of the stock market.

Now on to question two, which is really the key question. That is the point I would like to concentrate on: what are the factors behind the economic slowdown? Are they for the most part demand-side or supply-side factors? Naturally, inflation is driven by the balance of supply and demand. We have a central bank toolkit to influence demand, and we believe that it is supply-side restrictions that have made the difference. Those are, beyond the payment issue, the problem of scarce physical resources, primarily the labour force. The future proportion of supply and demand-side factors is very important to us.

ALEXEY ZABOTKIN:

Let me mention that production capacities are growing. Their current growth shrugs off today’s tight monetary conditions, as evidenced by the solid rise in investment since late 2021. Compared to 2021 Q4, investment (fixed capital investment or gross fixed capital formation — several indicators can be used) in the first half was up 25% (by one fourth from 2021 Q4). Doubtless, this will have a cumulative effect on growth in labour productivity and boost the efficiency of business processes. This is why economic potential is set to grow at a solid pace next year.

ELVIRA NABIULLINA:

This is a really important comment: in addition to the supply-side constraints we have, there are factors that boost economic potential and labour productivity.

QUESTION (RIA Novosti):

What is the possible scale of the decline in new mortgages in 2024? How long will bank deposits be more lucrative than investment in mortgages? What are the future implications of this for the economy?

And another question please. What can we do to resolve the problem of cross-border payments to China? You have mentioned today that the problem exists. What is your vision of the solution?

ELVIRA NABIULLINA:

Our view is that the rollback of universal subsidised mortgages will make for more moderate growth in mortgage lending without such a strong rise in house prices. We forecast that mortgage lending will expand by 7–12% in 2024, according to our July forecast. It is due for review in October. We believe that the revision of the criteria for targeted programmes has driven up the volume of subsidised mortgage loans. However, it is hard to identify the long-term trends following the changes in the criteria. As we have said before, it will be possible to make this judgement in the autumn. We will be monitoring the situation.

As regards cross-border payments, there has indeed been a further aggravation in recent months. For businesses, the problem entails an increase in transaction costs. All else being equal, it is a driver of inflation, which we take into account. And yet, as I have said before, we do not comment on the measures being taken.

QUESTION from LawAndFinance project:

How does the Bank of Russia explain the concurrent slowdown in GDP growth and the acceleration of inflation in 2024 Q2? And a second question, please. You say that it is imperative to bring inflation back to 4% next year. How realistic is this target, and which key rate would it involve?

ELVIRA NABIULLINA:

Speaking of concurrently slower GDP growth and accelerated inflation, it is indeed the issue we are analysing to identify the underlying factors behind the slowdown. If only demand-side factors had been responsible, we would have seen a decline in inflation. This means, in our opinion, that supply-side factors are definitely in place. We have yet to understand the correlation between supply and demand factors and their role in the economic slowdown.

On the subject of the 4% inflation target, we believe it is achievable for next year, and our policy is intended to deliver this. As regards the key rate this would involve, we will update the key rate path when we update our forecast in October. We will provide an updated key rate path with the baseline scenario required for inflation to return to 4%.

QUESTION from Reuters:

You have said that you will update the path in October. Are you leaving the chance of a key rate above 20% open, perhaps when you see the budget parameters?

And another question please. Why didn’t you raise the limit on yuan swaps as the banks requested? The banks released a public statement about it.

My third question is about the two subsidiaries of foreign European banks still on the list of systemically important banks. Do you think they will be removed when the list of systemically important banks is next updated? Overall, what do you think is to become of them in Russia?

ELVIRA NABIULLINA:

While on the subject of the key rate, we stand ready to make rate decisions as needed for inflation to return to the 4% target. We are holding open the option of increasing the rate at forthcoming meetings. Hopefully, by that time, we will have budget parameters for three years ahead, and we will account for them in our decision.

As regards yuan swaps, we have seen that the problems in the yuan market in recent months have propelled banks to lean heavily on Bank of Russia swaps for funding and to regulate open currency positions. We can see that our operations have almost become standing facilities. However, our swap tool is intended to provide insurance to smooth out volatility. It is not a funding instrument. That is why we believe there is no point in further increasing the supply of swaps for them to perform an unusual function. Incidentally, for central bank swaps to work as insurance, we have decided to raise the yuan rate to SHIBOR plus 12 percentage points. Importantly, the ruble exchange rate remains the same: the key rate minus one percentage point. We intend to gradually reduce the limit of this instrument. In the long term, we believe it is necessary to continue the policy aimed at reducing the share of foreign currency on banks’ balance sheets. The situation we are discussing is evidence of the need for such a policy, given that banks have recently been ramping up yuan loans. Companies have preferred foreign currency loans, realising that the rates on ruble loans are rather high. This process has recently come to a halt, and we are monitoring the developments. However, we need to see a further dedollarisation of bank balance sheets. We may resort to macroprudential add-ons in the case of foreign currency loans, if needed.

Now, as regards systemically important banks. The list is subject to regular review every autumn. At this point in time, it would be premature to comment on any potential changes to the list.

QUESTION from Interfax:

The IMF has made it clear that the fund is willing to resume consultations with Russian economic authorities, which have been on hold since 2022. Is the Bank of Russia ready to participate in these consultations, and are you ready to meet IMF representatives in person? If our understanding is correct, your adviser Ksenia Yudaeva is leaving her current position to become Russia’s executive director at the IMF?

One more question, if I may. The European Central Bank is pressuring banks that have Russian subsidiaries, prompting them to close down their business in this country. There are customer complaints about services and specifically a kind of discrimination, including in cross-border payments. Do you see this kind of discrimination? What is your approach to the problem? Is the Bank of Russia, the regulator, ready to recommend that the subsidiaries of foreign banks take a gradual approach to winding down their business in Russia?

And still one more question, if I may. Based on your conservative forecast for the economy for the next year, can we say that you do not rule out an excessive cooling of the economy next year?

ELVIRA NABIULLINA:

As regards the IMF, I can confirm that we intend to hold such consultations. They are standard practice for all IMF members. As a reminder, the IMF is an organisation of 191 countries. Yes, the consultations are being planned. As for the IMF executive director from Russia, it is up to the Government to nominate the candidate. The Bank of Russia has agreed with the nomination, but all the subsequent decisions have yet to be executed.

In response to the second question about the Russian subsidiaries of foreign banks, we indeed confirm the existence of such pressure. We consider the proposed segregation unacceptable. The subsidiaries of European and other foreign banks in the Russian Federation were founded in accordance with Russian law. In their operations, they are compliant with domestic regulations. Their compliance with ECB requirements and foreign sanctions runs counter to Russia’s law and order and is discrimination against their customers. In this regard, in our recent instructions to the subsidiaries of European banks in Russia, we introduce a ban on their denying transfers in foreign currencies or on any technical obstacles to such transfers for reasons outside Russian law. Furthermore, we prohibit these banks from transferring client data, including personal details, to their parent organisations or other members within a foreign banking group for the purpose of creating any black or white lists. Only information essential to payments is an exception.

While on the risks of excessive cooling, we are in a state of overheating. Doubtless, we need some cooling. A cooling economy means more balanced growth. For the avoidance of so-called excessive cooling or recession risks, timely action is needed to ease the current overheating, and under no circumstances should this overheating be allowed to intensify. That is probably the main recipe.

QUESTION from RBC Kavkaz:

Current staff shortages and competition for human resources are forcing companies in the southern region to continue raising wages. Will there come a time when businesses find it cost-prohibitive to raise wages, and their growth stops? How much does this indicator accelerate inflation? What is your view of skilled labour coming to Russia from abroad?

ELVIRA NABIULLINA:

The labour market is indeed a crucial issue. I should say that some companies are already struggling to raise wages given the costs, and the focus of their investment is turning to industrial automation and labour productivity. This investment is registered across multiple industries and enterprises. While these effects will take time to show up considering that the investment cycle is a protracted process and labour productivity cannot leap overnight, we do see such trends. And yet we expect the demand for labour to remain high in any case. Wage growth must be commensurate with growth in labour productivity to prevent it from accelerating inflation. To the extent that growth in labour productivity continues — and we record rising investment in greater labour productivity — real wages will continue to rise.

An expansion of supply in the labour market thanks to foreign specialists would indeed help ease a tight labour market. Even so, it is essential to take into account the skills. Their skills must meet the needs of the domestic labour market.

QUESTION from Rossiyskaya Gazeta:

Could you please tell us more about the magnitude of your upgrade to the inflation forecast in October? How sharp might the upgrade be? Is 7.3% to be expected, as in the Ministry of Economic Development’s forecast, or higher?

My second question is about the exchange rate. While previously the impact of the Bank of Russia’s key rate decisions on the ruble exchange rate was noticeable, it now seems that everything depends on the balance of trade and sanctions. Do you still believe that key rate decisions have a meaningful impact on the ruble exchange rate?

ELVIRA NABIULLINA:

As regards the revision of the inflation forecast, I would rather withhold the figures. The forecast is up for review in October. It will however highly likely exceed the upper bound of the forecast we unveiled in July. Then, we assumed 6.5–7%.

As regards the impact of key rate decisions on the exchange rate, I agree that the impact was clearly immediate thanks to the vital role of cross-border capital flows and the fairly large share of non-residents in the market, including the market for federal government bonds. The impact of these factors is still relevant but has become time-stretched. That is, our key rate decisions influence demand for imports in ruble terms and thus feed into the exchange rate of the ruble through the balance of trade, but it is a time-stretched process.

ALEXEY ZABOTKIN:

Indeed, we have a holistic review of our forecast, and review cannot be based on just one variable. However, to make sure the inflation forecast stays within the current range, the pace of current growth in September and October must decelerate significantly relative to July—August. Growth in the underlying components [of inflation] must decelerate.

QUESTION from RBC:

Talking Trends, a Bank of Russia bulletin, notes that signs of cooling in the economy and more sustainable growth are due to emerge soon. Do you agree? What event would strengthen the Bank of Russia's confidence in the onset of a cooling? What indicators, and of what values, signal overheating or cooling?

The second question follows up on the first one. I have several questions on an earlier topic: yuan swaps. Do we rightly understand your decision and statement that the Bank of Russia does not intend to provide any additional support to ease the yuan liquidity strain the bankers discussed? Could your swap decision somehow smooth out the spread between the yuan to ruble and yuan to dollar exchange rates?

ELVIRA NABIULLINA:

As for signs of a cooling economy, we look at a wide range of indicators, including consumer and investment activity. Beyond income, personal loans and retail lending have an important effect on consumer activity. That said, let me stress that we are focused on the growth of total, aggregate, credit to both companies and households, since total credit is part of the monetary aggregates. There are tentative signs of a deceleration in sight. We will make our decision in October based on new data.

Regarding the yuan deficit, I would like to emphasise that there has not been and there is no deficit of payment liquidity in the yuan. In terms of meeting the demand for yuan payments, there have been no problems. The problems were mostly with the regulation of open currency positions, and so we believe that central bank currency swaps should not be used to close open currency positions.

As for the spreads, they were indeed high on certain days. Having said that, we can see that the spread between the cross rates recently narrowed significantly to less than 1%. We will monitor the trends.

ALEXEY ZABOTKIN:

We must differentiate between liquidity and funding. Liquidity is a bank’s ability to make a payment today in the currency in which the client wants the bank to make the payment. If we have any issue with yuan payments, it is mostly not related to sending the money over but to having it accepted. Funding is a different story — it is about the balance sheet structure, the ratio of same-currency deposits to loans. The ball is now in the banks’ court. It is up to them to ensure that their lending activity meets their capability to raise liabilities in foreign currencies.

ELVIRA NABIULLINA:

I missed the question about indicators of overheating. What is commonly known as overheating is the output gap: how much GDP growth is above potential. The key indicator of overheating is inflation and persistent inflationary pressure.

QUESTION from Financial One:

Following up on the 2025 GDP forecast, the topic has drawn interest because of the large difference between the Bank of Russia's and the Ministry of Economic Development’s forecasts. Naturally, this has given reasons for analysts to begin their interpretations, as they usually do, and those who disagree with the central bank policy say that the Government is making every effort to spur economic growth, but the Bank of Russia is raising the key rate and thus thwarting growth. There will probably be many comments like this. What is your response?

ELVIRA NABIULLINA:

In our view, sustainable economic growth is impossible when inflation is high. Therefore, reducing inflation to target is a key measure to ensure sustainable economic growth. I will reiterate. It is a prerequisite for the long-term loans we need for investment. We increase the key rate to make sure we do not waste resources and effort. This is for the sake of GDP growth, not growth in inflation. As things stand, given the labour shortages we have and the lack of production capacities, incentivising demand could only send inflation higher, while output would remain unchanged. We should make sure this does not happen.

ALEXEY ZABOTKIN:

Behind the Ministry of Economic Development's forecast is their view of monetary policy based on our communication. Under their forecast, a monetary policy that delivers steady inflation at 4% (they forecast 4.5% next year) will enable real GDP to grow by 5% next year. For us, that is not the baseline scenario since our assumptions are based on more moderate projections of the pace of economic growth, as history suggests. We believe that growth in economic capabilities will exceed the 10-year high but still be slower than what is needed for overall economic growth of 2.5%. Having said that, our disinflationary scenario assumes a more optimistic estimate for potential growth. It assumes GDP growth of 2% to 3%. More so, with the economic overheating fading sooner [in this scenario], the downward movement of the key rate is also faster than in the baseline scenario.

QUESTION from fontanka.ru (online portal):

The Bank of Russia says the rate increase is aimed at cooling demand, which makes for a cooling of the economy and slower GDP growth. On the other hand, the regulator denies the negative impact of the key rate on economic development despite an abnormally high share of interest costs in investment. Assuming the high loan rates do not thwart economic development, they still help cool the economy, don’t they? How does this mechanism work so that economic development is checked, on the one hand, and the economy comes out unscathed, on the other?

ELVIRA NABIULLINA:

First, measures towards economic cooling and to halt excessive lending are consistent with the ‘do-no-harm’ principle. They are needed to allow production capacities and the supply of goods and services to catch up with outrunning demand and ward off any risk of accelerating inflation. High interest rates prevent inflation rather than hold back sustainable economic development. As regards investment, there is no contradiction either. Let me reiterate that credit is not the main source of funding for investment. The main source is own funds. We have seen substantial growth in equity and corporate profits. Another source of finding is the capital market, share capital, which is being underutilised, and that is the key problem. Our key task is to break this vicious circle. As for the servicing costs you mention, I think we have an estimate, and it puts average loan servicing costs for companies at about 5% of input costs. Clearly, over-indebted companies may be paying more, but 5% is the average. That is not too great a share of input costs: raw materials, supplies and payroll account for much more. The growth in raw material prices is driven by inflation. Therefore, the rise in the costs of high inflation for companies is greater than the rise in loan servicing costs.

ALEXEY ZABOTKIN:

Importantly, the growth of loan servicing costs is transitory. That is, once inflation slows down, we will lower the key rate. This will bring down corporate costs for debt servicing. Conversely, inflation brings up the costs of raw materials, equipment and payroll forever, irreversibly. That is the big difference.

And there is another point to make: cooling is about closing the gap — the excess of demand over production capacity. At the same time, potential GDP continues to grow, as I said in response to the previous question. This is enabled by the investment growth that has occurred. Even if we see no further expansion of investment — given that it is 25% higher than 2.5 years ago — the current level of investment activity will bring about higher potential growth, which is essentially the only source of sustainable, measured growth.

QUESTION from Furydrops (weblog):

My first question is about the estimated interest costs in the corporate cost structure. First, could you please clarify how these estimates were obtained? Are they based on polling or other methods the Bank of Russia uses?

Second, do you at the Bank of Russia not think that the more relevant indicator is, rather than the cost structure, the impact of a 1pp rate increase on shrinking margins? A decline in margins potentially resulting in pass-through is ultimately the more important factor. While it is clear that pass-through is not always possible, it seems to me that it is more important to discuss margins than costs. Do you agree with this view?

My second question is about dynamic inconsistency, which may emerge in the future. If the central bank raises the key rate but cannot influence the Government’s decisions on tax increases to close the deficits the Government is running, the Government may opt to increase public debt, and the Central Bank cannot influence this decision. This vicious cycle brings the problem of a key rate rise triggering a rise in the cost of public debt, automatically spiralling this ‘arithmetic’ cycle. This ultimately renders the central bank incapable of influencing inflation in the long term. How serious, in your opinion, is this risk to the Russian economy at the moment?

ELVIRA NABIULLINA:

Speaking of debt servicing costs at 5% (of the cost of sales), it is evidenced by company statements submitted to Rosstat. The 5% even seems to be the upper bound, for the reason that the actual data came in a little lower. We based this on upwardly adjusted data from 2019 to 2023, but the main source is still reporting statements.

Now on to profit margins. Indeed, inflation was low when the key rate declined, but producers did not lower prices, despite the lower interest costs, and thus increased their margins. On the back of this factor alone, they managed to build up some extra margin. This is evidenced by their net financial results. This is also confirmed by fresh Rosstat data: there is good reason to say that margin is not the issue. H1 profit was lower than last year but totalled a significant 14 trillion rubles, which is a fairly solid value. This suggests there are no problems with margins.

Now on to question two, which is a very important question. Let us suppose we are in a situation of fiscal dominance, in which the key rate largely falls short. However, I believe that we are far from that scenario thanks to our small public debt. Therefore, keeping public debt at a manageable level is vital.

ALEXEY ZABOTKIN:

Let me also say a few words about margins. You are right to say that profit margins determine how much companies pass on their extra costs to prices. That is definitely the case. More efficient companies with higher profit margins can absorb extra costs by reducing their margins. What does that depend on when it comes to extra interest costs? [It depends on] the level of corporate debt and how sensitive companies are to interest rate increases. Accordingly, companies enjoying high margins and lower debt find themselves in a more competitive position compared to those with lower margins and higher debt. In a period of tight monetary policy, they are likely to increase their market shares. In my opinion, that is the result of fair competition.

Now on to the subject of fiscal dominance. The key article on the subject is by Neil Wallace and Thomas J. Sargent. It is wonderfully elegant. Its key idea is formulated in seven pages, in a way that is very constructive. The first thesis is that, under fiscal dominance, when budget deficits can no longer be financed by increasing the public debt-to-GDP ratio, it is indeed increasingly difficult to conduct monetary policy. The authors assume that this will happen. However, at the end of the article, in the last sentence, if I remember correctly, they in fact state that nothing in their analysis refutes the ability of monetary policy to control inflation on an ongoing basis given a monetary policy stance that ensures the sustained discipline of the fiscal authorities. That is, under a central bank policy that is consistently aimed at price stability — and if all economic agents, including the Government, are aware of this — an independent central bank can deliver on its inflation target over an unlimited horizon. Those are the conclusions of the first article on the topic, and it was written forty years ago.

QUESTION from Russia 24 TV:

How efficient and transparent is the shaping of the ruble exchange rate in over-the-counter mode? Do you intend to make any adjustments to the way it works?

And another question, please. How real is the threat of stagflation now?

ELVIRA NABIULLINA:

True, after the Moscow Exchange was sanctioned, we had to change the methodology for setting the official exchange rate in the foreign exchange market. We are however aware of the market’s concerns about exchange rate formation in the new conditions, and we have published the methodology for the calculation of the exchange rate on our website. In our view, the process is absolutely transparent. We use the same approach as in on-exchange trading. In other words, we calculate the exchange rate on real transactions, weighing it by their volumes, to obtain the average volume-weighted exchange rate. We take the data from bank reporting statements, which we have, so we believe that the methodology is quite transparent and reflects the actual exchange rate.

While on the risks of stagflation, it is probably of concern to all central banks and also governments. It is when inflation is rising and growth has all but ground to a halt. It is imperative that we avoid that scenario in a situation of overheating and labour shortages. That is the rationale for our key rate decisions. By raising the key rate, we are trying to eliminate the conditions in which a shift to that scenario might happen.

QUESTION from NTV:

Since July, the most popular subsidised programme of mortgage lending has no longer been available. The mortgage market is cooling, constructions are being completed, properties are selling, and finishing and furniture are more expensive. Does the Bank of Russia account for the fallout from the rollback of subsidised mortgages? And, if so, how long will it affect inflation, in your opinion?

ELVIRA NABIULLINA:

Indeed, you are correct in saying that we are seeing more inertia of demand, on the back of previously received mortgages under the universal subsidised programme and previously bought flats. Currently, the need to fit out flats is sending the demand for personal loans higher. This is likely to last for a year and a half given the cycles of construction and repairs.

Nonetheless, the level of the key rate will determine the amount of personal loans for repairs. Overall, the impact of this demand on loans is lower than of overheated demand for mortgage loans. The obvious reason is that less money is needed for repairs and finishing works than for buying a flat.

The second potential impact of the subsidised mortgage programme is its implications for corporate rather than consumer credit. That is a case of developers relying on project finance, that is, drawing on escrow accounts for project finance. The moment project finance has been provided, money enters the economy and impacts aggregate demand.

QUESTION from Kommersant:

I would like to ask you about the external sector. How much did the current slump in prices for oil and other commodities affect today’s decision, if at all, considering the inflation drivers you have mentioned?

Are we still in the baseline scenario, or are we seeing a certain shift towards the risk scenario?

ELVIRA NABIULLINA:

We discussed that. We believe we are still in the baseline scenario. Inflation is progressing, and core inflation is currently higher than in our baseline scenario.

As for the decline in oil prices, we will analyse how much of it will be factored into our baseline scenario in October. Certainly, we are watching the trends in the external sector. However, it really is an inflation driver in the baseline scenario, which we have stressed.

ALEXEY ZABOTKIN:

We would like to stress once again that the risk scenario is a kind of serious stress scenario. The global economy not headed in that direction. The scenario is indeed similar in nature to the global financial crisis of 2007–2008. At the time, the world plunged into that crisis abruptly rather than gradually.

QUESTION from Elakhovsky (YouTube channel):

The assessment of households’ inflation expectations for August shows an interesting paradox. Respondents without savings note that both inflation expectations and observable inflation — if still high — declined. Only those with savings mention growth. How does the Bank of Russia explain this discrepancy?

My second question is about coordination between the Bank of Russia and the Government. In the baseline forecast, the Bank of Russia assumes maximum GDP growth for 2025 at 1.5%, while the Ministry of Economic Development gives 2.5% as the only option. Given that the ministry’s forecast determines federal budget planning, are you coordinating your work on these forecasts with the Government? If you are, why is there a difference? If you are not, what might be the economic consequences of this non-coordination? Generally, to finish on a metaphorical note, do you feel support from the Government in the fight against inflation, or are you the only warrior on that battlefield?

ELVIRA NABIULLINA:

First, on macroeconomic policy, we do have coordination, or interaction. The Government takes our decisions and monetary policy stance into account. We seek to explain the rationale behind our actions. The Monetary Policy Guidelines are discussed at Government meetings. We likewise take into account the Government’s actions, primarily in fiscal policy and other measures that are in place, including those related to supply. Both supply-side and demand-side policies affect inflation control. We influence demand. Let me say it again: the Government influences supply, and we take that into account. We can see that the Government is placing heavy focus on bottlenecks and constraints on the production of goods and services. In other words, the Government is making efforts to boost economic potential. We do take that factor into account.

Now on to the difference between the forecasts. History shows that there has always been a difference. The Bank of Russia conducts monetary policy independently based on its own projections. We update our forecast four times a year at our policy meetings. The Government has its own update cycle. We account for each other’s assumptions.

In Bank of Russia monetary policy, we show preference for more conservative estimates for future economic trends. However, I will say it again (and Mr Zabotkin has mentioned this) that we also have the scenario that the Ministry of Economic Development takes as a basis, and we think that scenario is not impossible, but it involves more intense growth of economic capabilities.

Now on to inflation expectations. People without savings have always had higher inflation expectations than people with savings. The dynamics of expectations may differ in different periods of time.

ALEXEY ZABOTKIN:

Overall, monthly changes in an indicator including inflation expectations are not very informative. Therefore, when we update our forecast and analyse the data, we look at more persistent trends, averaged measures for several months.

As regards Denis’s question, the inflation expectations of respondents without savings were indeed down in August but rose significantly in July. That rise came as no surprise given the scale of indexation of utility rates, to which this population group is more sensitive in its assessments. That is, August simply offset the volatility of July, which was in the opposite direction. Over the past three months, inflation expectations were overall on an upward path in both population groups, which should not be the case in sufficiently tight monetary conditions.

QUESTION from Nezavisimaya Gazeta:

Let me revisit some points about the risks of excessive cooling. What is the lag of the Russian economy’s response to a key rate hike, according to your data? Isn’t there a risk of excessive cooling in an economy that has yet to fully respond to the previous tightening? Would rather frequent rises in the key rate not bring a negative accumulated effect resulting ultimately in excessive cooling?

ELVIRA NABIULLINA:

Our key rate decision takes between three to six quarters to make a full impact on inflation. However, that is not to say there is zero impact in the early months. When we made key rate decisions in the past, it took banks up to several weeks to change their deposit rates, let alone their rates on loans. The process has become quicker. All this impacts people’s saving activity. In other words, the pass-through to prices is faster. Doubtless, the effect of decisions we have made before today has yet to fully materialise. We are perfectly aware of that. We realise that there are lags. We take all these factors into account in our decisions.

QUESTION from Bankiros.ru (finance portal, Nizhny Novgorod):

While keeping the Bank of Russia's requirements for lending to households unchanged, what should be the key rate for the market average unsubsidised mortgage to return to 8%? Will we see this level in the next five years if everything goes to plan and inflation descends to close to 4%?

ELVIRA NABIULLINA:

Mortgages are long-term loans, and long-term rates are determined by the expectations of both banks and borrowers, rather than the level of inflation and the key rate throughout the loan cycle. Suppose we reduced the rate to 1% today. It would not necessarily send deposit rates or yields on securities — market rates — lower. Just imagine: were we to lower the key rate, would you personally agree to deposit your savings at 3%, for example, in the expectation of inflation above 9%? I do not think anyone would make a deposit — and I do not think any other depositor would do so. Loan rates must be higher than deposit rates. Banks will not operate at a loss. Therefore, the prerequisite for lower rates on long-term loans is low and predictable inflation for much longer than today, to ensure that the market is confident that inflation will be low over a 10—15—20 year horizon, consistent with mortgage terms.

That is why it is critical that inflation be brought back to target faster, and we should make sure that even if inflation moves away from target on the back of shocks and sanctions, the Bank of Russia brings it back to target. I often cite this example in response to talk of the end of universal subsidised loans of 8%. Let me remind you that our interest rate was approximately the same when inflation held near 4% for some time, and the market rates were absolutely affordable. Therefore, the return of inflation to target is crucial for us. That means that the key rate is close to the neutral rate, supporting the development of market-based mortgages.

QUESTION from Moskovsky Komsomolets:

In addition to China, we are having payment problems with other friendly countries including the United Arab Emirates, Turkey and even CIS partners. The problems were particularly aggravated after the US Treasury’s resolution in December 2023. Many months have passed, but the problem persists. With a BRICS summit due in Kazan in October, how does the Bank of Russia intend to solve this problem? What will your solution be like, if any? Given the launch of the digital ruble, will the solution be in this area, possibly, digital currencies or anything else? How is the regulator planning to launch its own CBDC? Will you be joining China and Iran in the project?

ELVIRA NABIULLINA:

I understand that everyone is concerned about cross-border payments. Doubtless, we are focused on the search for multiple instruments for cross-border settlement. For obvious reasons, I will not disclose the details. I can only say that we are working with all partners and discussing both bilateral and multilateral formats. In response to your words about BRICS, yes, digital financial assets, as well as central bank digital currencies, have solid prospects. We are prepared, but it is key to find mutual understanding with our partners on the subject.

QUESTION from FederalPress (news agency, Sverdlovsk Region):

According to experts, the prohibitive cost of borrowed money has become the main risk that could trigger large-scale bankruptcies of both small and large companies. Do you agree?

ELVIRA NABIULLINA:

I do not. Let me say again that we do not expect that costly borrowed money might trigger large-scale bankruptcies. The quality of loan servicing remains good, and the share of bad loans low. The share is 5%. The share of non-performing loans remains low, and we also analyse restructuring trends. When companies struggle to service loans, they ask banks to restructure them, and banks often agree. The share of restructured loans is not growing and remains very small, currently sitting at approximately 2% of the portfolio. That is the average over the period since early 2023, so these indicators give no cause for concern. Most borrowers are in a fairly good position. You will recall that profits have been high and are sufficiently high at this moment. It is clear from public companies’ statements that they are maintaining financial stability overall. Certainly, the unreasonable policy of debt accumulation in previous years may cause trouble for certain companies. The pace of growth [financed by such debt] is not sustainable. That is to say that companies can rely on the capital market not only for borrowed funds, but also for equity capital for development.

QUESTION from Money Don't Sleep project:

Private investors say that many prefer deposits to stock market investments. Therefore, the onset of a rate reduction cycle could come with the risk of a second cycle of inflation as households buying certain goods or services would thus be transferring money from deposits to the real sector. What do you make of this risk? Are there any ideas about how to curb it?

My second question is about the real estate market. We can see a cooling in the market, triggered by the end of the subsidised mortgage programme, and developers are really reporting plummeting sales. How stable is the market? What can you say about the financial stability of developers? And most importantly, should households expect a decline in house prices?

ELVIRA NABIULLINA:

In response to the first question, we are indeed aware that the overhang of savings has emerged in discussions. The logic of these discussions is simple: high interest rates make people save, and lower interest rates prompt them to dump their savings into the market and thus trigger a further spike in inflation. However, I do not think that makes sense.

For example, during the pandemic in the Western countries, there was talk that savings might pour into the market: people had been given much money, but the restrictions prevented them from spending it. Once those restrictions were lifted, deferred consumption spilled over to the market. We do not have that problem.

We always have to account for the existence of savings. We could imagine that the key rate declined abruptly and all that savings went towards consumption, but that would mean a totally thoughtless monetary policy. That is precisely what we manage through the key rate. Hence, we do not think that this risk exists, and we are always analysing the propensity to save and consumption activity to ensure that everything is balanced and that development brings about relatively low inflation. We see no such risks.

As for the risks of developers, that is also an important question. We analyse financial stability risks and the financial standing of borrowers, including in the construction business. We assess their position to be stable enough. It may vary from company to company. Certain companies are more stable, as they say, while others are less stable and have certain problems, but in general, the financial position of developers is stable, taking into account the cushion developers built in good times.

Speaking of the decline in housing prices, housing prices have indeed been outpacing inflation. In our opinion, that was a consequence of the long-term subsidised mortgage programme. We understand that prices will not adjust immediately. However, signs are emerging that housing prices in the primary market are going down in nearly one-third of the regions. That is encouraging. Clearly, the gap between prices for new and existing homes remains high and is projected to narrow. Unfortunately, it will not happen overnight. However, the measured growth in mortgage lending we seek should make homes more affordable. That is, we seek to make homes, rather than mortgage rates, more affordable.

Thank you for your questions.

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