Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 14 February 2025

Good afternoon,

Today, we have made the decision to keep the key rate at 21% per annum.

Inflation notably accelerated at the end of 2024. According to our estimates, this was the result of the considerable overheating in demand that could even have become stronger in the second half of last year. At the same time, factors that will be slowing down inflation have been gaining momentum. In the first place, this is a continuing cooldown in the lending market coupled with a rise in households’ saving activity. Thus, we are now more certain that monetary conditions have already become restrictive enough for inflation to start decelerating in the next few months. Therefore, we have decided to continue the pause in key rate increases. If the earlier monetary policy tightening turns out to be insufficient, we will be ready to reconsider the issue of raising the key rate at our next meeting.

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

Firstly, as regards inflation.

Price pressures remain significant. The underlying inflation indicators exceeded 10% by the end of 2024, which is certainly an intolerably high level in our view. In addition to the underlying factors, the price dynamics in December were also affected by the earlier weakening of the ruble. In particular, the growth of prices for products highly dependent on the exchange rate, primarily electronics and household appliances, sped up.

The underlying component of inflation was largely fuelled by inflation expectations. They are still very high among all groups of economic agents. Analysts who participate in our macroeconomic survey have raised their inflation expectations for 2025. At the same time, according to recent data, businesses have substantially lowered their price expectations for the first time since 2024 Q1, which is an optimistic sign.

High-frequency data on inflation in January and February suggest that current price growth has slightly decelerated compared to the end of 2024. However, it would be premature to talk about a reversal in the trend. 

As to the revision of the inflation forecast for 2025, I would like to notice that this year has started from a very high level, that is, very high price growth rates. Due to considerable inertia, it will take time to slow down inflation and prices will rise by 7–8% by the end of this year. Nevertheless, price growth is expected to slow down every quarter and, by the end of 2025, month-on-month inflation will be consistent with the rate of 4% in annualised terms. Our inflation forecast relies on the baseline scenario that assumes a gradual return of the economy to a balanced growth path. 

I will now speak of the economic situation.

The recent statistics for 2024 Q4 show that GDP growth has sped up. According to our estimates, the economy’s upward deviation from a balanced growth path has not decreased.

Alongside inflation, another major indicator of overheating is the labour market. Although staff shortages are still acute, businesses continue to signal that the situation has started to return to normal. Our regional branches report a higher number of companies that have been decreasing the demand for labour. This means a more active reallocation of employees from some industries to the ones that are still experiencing considerable staff shortages. Overall, companies are reducing their recruitment targets and no longer plan to raise wages as fast as last year. Combined with the measures taken by businesses to enhance their efficiency, this will help make the growth rate of wages more in line with the rise in labour productivity.

The updated forecast takes into account that domestic demand expanded more significantly by the beginning of 2025 than previously expected. Accordingly, GDP growth will be slightly higher this year, specifically 1–2%. Meanwhile, we have reduced our GDP growth forecast for the next year in an equivalent way. Overall, our view of the medium-term path of the economy remains unchanged. We expect that, as the effects of monetary tightening and fiscal policy normalisation build up, overheating will be gradually decreasing. Accumulated economic growth over the next three years will be in line with our October forecast.

Now, as regards monetary conditions. 

Since our December meeting, interest rates in the financial market have edged down, whereas non-price bank lending conditions have become more restrictive. Generally, the dynamics of loans and deposits suggest that monetary conditions are tightening further. Lending is already cooling down in all market segments. Furthermore, households have increased their saving activity.

The reduction in market rates is associated with two factors. The first one is that market participants have revised their expectations of the key rate path downwards. As a result, yield curves in the money and debt markets have notably shifted lower since the end of December. Secondly, we have fine-tuned some regulatory measures. This has partially eased the excessive tightening of monetary conditions that was related to the regulation. Nonetheless, interest rates are still rather high.

Affected by restrictive monetary conditions, lending has been slowing down since December. Over the past two months, banks’ corporate and retail portfolios have both contracted. The decline in lending activity is one of the first stages of the transmission of our decisions to the economy, while the inflation rate is the final one. It will take time for the current slowdown in lending to fully translate into prices.

It is worth taking into account that the deceleration in corporate lending is associated not only with our policy. Another important factor is budget expenditures. Normally, budget payments peak in December. This year, budget expenditures were high in January as well, exceeding their seasonal norm. This was explained by earlier prepayments under state contracts. Having received budgetary funds, companies were actively repaying bank loans. Hence, the data about the decline in lending are, so to say, noisy. According to our estimate, if adjusted for the budget payments, the slowdown in lending is more moderate. We consider that the combined effect of the budget and lending will result in more modest dynamics of money supply. As is evident from recent data, money supply is growing more slowly than at the end of last year. We will continue to closely monitor changes in budget expenditures, comparing them, among other things, with the pace of the cooldown in the lending market.

We have revised the lending growth forecast for this year downwards to 6–11%. The lending growth will be slowing down due to both tight monetary conditions and the planned normalisation of the regulatory requirements. More moderate growth rates in lending are necessary to ensure disinflation in the economy.

Briefly about external conditions.

The world economy has continued to expand at a moderate pace. According to our updated forecast, the dynamics of the key items of the balance of payments have remained nearly the same compared to October.

It is worth noting that, beginning from our February meeting, we switch from publishing forecast for Brent oil prices to Russian oil price used for tax purposes. This price better reflects how the situation in the oil market affect the key indicators of the Russian economy.

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

The balance of risks is still shifted towards proinflationary ones.

As regards the factors that might cause a deviation from our baseline scenario towards a higher inflation rate, I would notice risks related to the external environment. The threats of new trade wars and fragmentation of global markets entail risks to business activity worldwide and might lead to a decline in the demand for Russian exports. As a result, we might face a decrease in both the price and quantities of exports. Moreover, there are still risks associated with inflation expectations and the labour market.

The key disinflationary risk is a more substantial deceleration in lending. Our baseline scenario assumes a gradual and controllable decrease in lending activity. Nevertheless, the risk of a sharper slowdown does exist. This is why we will be tracking credit dynamics very closely. 

Changes in fiscal policy parameters, including the scope of subsidised lending programmes, might influence our decisions. The baseline scenario implies the return to the fiscal rule in 2025, which will have a disinflationary effect. 

Furthermore, when making our decisions, we will also take into account geopolitical factors. They remain a source of high uncertainty.

Winding up, I would like to comment on monetary policy outlook.

We have concluded that the pause in key rate increase is the most balanced decision in the current conditions. At our next meetings, we will need to make sure that the existing trends are leading to a steady decrease in inflation. If it turns out that monetary conditions are not sufficiently restrictive for a sustained slowdown in lending and inflation, we do not rule out the possibility of a further key rate increase. Whatever the case, monetary conditions should remain tight for a longer period. Therefore, we have raised the forecast path of the key rate for 2025–2026.

Thank you for your attention.