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Statement by Elvira Nabiullina, Bank of Russia Governor, in follow-up to Board of Directors meeting 15 December 2017

15 December 2017



Today the Bank of Russia Board of Directors decided to cut the key rate to 7.75% p.a.

The reason behind our decision to proceed with a 50 b.p. step is the change in our 2018 outlook. With oil producers having agreed to extend the output cut deal, there is less uncertainty now. This is a powerful drag on the relevant pro-inflationary risks. We have updated our macroeconomic forecast to reflect these developments. I will give you more details shortly.

We hold open the prospect of a certain cut in the key rate in the first half of 2018. There will be a phased approach to these decisions; we will likely proceed with pauses to see how financial markets, domestic demand and consumer prices respond to the recent key rate decisions. Our monetary policy is on course to become increasingly more neutral next year. This phased approach will give all market players the time they need to adapt themselves to a new environment.

I will now proceed to tell you more about the factors we considered while making this decision. Consistent with my previous statements, let me begin from inflation.

Our confidence that low inflation is sustainable has grown.

Annual price growth for most goods and services has slowed down to 4% or lower. In November, this reading was registered in two thirds of all consumer basket components. Inflation across virtually all Russian regions, that is 81 of 82, is now equal or below 4%. In November, average inflation for the past twelve months was down at 3.9%. This reading reflects average inflation pressure in the economy for the whole of last year.

This index comes as a result of two key factors sustainably weighing on inflation.

Factor one. Our consistent monetary policy of the year and before. It is thanks to this policy that the recovering consumer demand has triggered no stronger inflationary pressures. That is, on the one hand, there was an acceleration in both consumption growth and real wages, and we saw a recovery in lending including increased household demand for loans. Key rate reduction, both implemented and expected, emerged as the main driver loosening lending conditions for Russian companies and households this year. On the other hand, the course of these processes was fairly gradual and smooth. Savings behaviour was steady enough and matched nominal income dynamics. We saw further reduction in dollarization of deposits. Households are intensely interested in investments in bonds and other financial instruments.

Importantly, the financial market is currently seeing a normalisation of yield curve - which had been inverted for long. Yield curve is increasing mainly on the back of short-term rates given that their potential reduction exceeds that of long-term ones.

Decreasing inflation expectations come as the second driver of sustainably low inflation. Financial market players’ and professional forecasters’ expectations are becoming anchored at 4%, although they were much higher just a year ago. Household inflation expectations, albeit uneven in the course of the year, have overall declined over the past twelve months by approximately 4 percentage points (that is, more than actual inflation). We are slowly becoming accustomed to low inflation. This is evidenced by recent surveys. In this way, there was no downward movement in inflation expectations in the first autumn months despite the slowdown in inflation, especially food inflation. However, the subsequent actual price movements started to weigh in on inflation expectations, sending them much lower in November. We expect inflation expectations to hold sustainably within a new much lower range. And, it is their sustainable nature that is our priority. We need to ensure they are immune to price movements. We are unable to say at this juncture how long this process will take, which is still an uncertainty factor.

Furthermore, we have taken into account that inflation between October and December is likely to be below our expectations. We at the Bank of Russia attribute this mainly to the impact of temporary factors. They are set to run their course in a relatively short term.

In November, annual inflation was at 2.5%. It is expected to hold close to this level through the year-end.

Central to this substantial decline in inflation was the strong performance of our agricultural industry. Annual growth in prices of food products was a mere 1.1% in November.

The effects stemming from good crops in 2017 are set to taper off gradually. This factor is set to remain impactful on annual inflation in the first half of 2018. It is not expected to run its course before the third quarter.

Nevertheless, sustainably low inflation can be delivered through weaker price fluctuations relative to this year. This can be achieved not only through growing agricultural outputs, but also through the development of storage and transport facilities.

Another inflation constraint is the strengthening of the ruble. Much of the ruble appreciation fell on the first half of this year. This impact has fully translated into prices and is expected to fade away in early 2018.

Exchange rate fluctuations are not a thing of the past, they will happen. The application of the budget rule reduces the dependence of the economy, including foreign currency rate and inflation, on price movements in the global energy commodities market.

Given the factors I have mentioned inflation will gradually reach 4%. The first months of 2018 may see inflation fluctuating around 3%. Our estimates suggest that in the second half of the year inflation will come close to 4% as this year’s temporary factors taper off.

Going forward, our medium-term baseline scenario provides for higher oil prices in 2018.

We have factored in the recent agreements achieved by oil exporting countries. We now assume in our forecast that the average price of oil will change from $44 to roughly $55 a barrel next year, which is close to this year’s average readings. However, we do not have any grounds to abandon a conservative approach in the medium term. Unless the deal is extended, oil prices will gradually decline in 2019-2020 to just above $40 a barrel, the level we have previously expected.

As a result, we revised our next year economic growth estimates upwards. We no longer expect it to slow to 1-1.5% next year, but believe that this year’s growth pace will be preserved. The year 2019 will see a slight decline in the economic growth pace to 1-1.5% with a rebound to 1.5-2% in 2020.

Against this backdrop, our monetary policy will, on the one hand, bring inflation close to 4% and, on the other hand, sustain the economic growth pace close to its potential, thus mitigating the risks of both overheating and cooling of the economy. We are currently estimating the potential growth pace at roughly 1.5-2%. Structural reforms may bring it higher. Should that be the case, economic growth will be driven by rising labour productivity unaccompanied by growing inflationary pressure.

As regards the balance of payments forecast, our updated baseline scenario does not provide for a drop in the current account balance in 2018. It will stand at roughly $43 billion after $40 billion as of this year-end. However, our Ministry of Finance will conduct more sizeable transactions in the FX market under the budget rule. This will largely offset the impact of high oil prices on exchange rate movements and overall internal economic conditions in 2018.

In recognition of higher oil price outlook and upgraded current account estimates, we revised upwards our estimates of next year’s net private capital outflow - from $10 billion to $16 billion. These are the two sides of natural processes in an open economy, translating into the balance of payments. I would like to emphasise once again that net private capital outflow in the released balance of payments statistics should not be confused with illegal capital exports or capital flight. Any country that enjoys current account surplus exports capital either through the accumulation of public FX reserves or through the private sector. Therefore, capital outflow is not always bad and capital inflow is not always good for the economy.

Ultimately, as before, we looked at the risks of inflation deviating upward and downward from the target.

There have been fewer short-term risks brought by oil prices. We may say that the risks of inflation deviating upward and downward have become almost even over the 2018 horizon thanks to our decisions

However, we still consider pro-inflationary risks more significant in the medium term. These risks are almost invariable; we always mention them in our press releases, and, therefore, I will only outline them. Risks arise primarily from the fact that household inflation expectations have yet to be anchored at a low level. For the time being, they have demonstrated greater sensitivity to bad news suggesting inflation acceleration rather than slowdown. In addition, risks include a more abrupt abandoning of the savings model by households, as well as possible skilled labour shortage. Risks brought by the price movements in global commodity markets may exacerbate. The Bank of Russia will estimate potential risks coming from other external factors and take into account possible adjustments to the fiscal and tariff policy over the whole forecast horizon.

Significantly, as we speak about risks we do not mean that some undesirable trends are already materialising in certain areas. For the time being, both the labour market and a revival in consumption are progressing in a balanced manner. It is highly important that this balance hold for inflation to become anchored close to 4%. For this reason, changes in monetary policy, which have a considerable effect on the internal economic environment, should be consistent. In these circumstances, as I said at the beginning, we will smoothly shift towards neutral policy. After each move we will look closely at the balance of risks for inflation and economic developments against our forecasts.

Q&A for the Media

QUESTION from Bloomberg:

Two questions, if I may. The first one concerns today’s pace of reduction. It came as a surprise for all market participants. None of the analysts expected such a move.

What do you think? Was the Bank of Russia’s failure to give any signal before the week of silence began a mistake, or was it done with a purpose?

And the second question. Could you please explain the wording of ‘the Central Bank holds open the prospect of some key rate reduction’. What is meant by the word ‘some’ here? Does it mean that the reduction will not be smooth or that there may be a pause in the first half of the year?

You are to hold four meetings. Could you please explain.

Thank you.


Thank you. Certainly, we monitor market expectations in relation to our decisions. And we were aware that most [market participants] expected the pace of reduction to be slightly different.

We considered these expectations before the beginning of the week of silence. They were, shall we say, varied. Nevertheless, most analysts believed the pace to be 0.25 pp, however a considerable portion of analysts and market participants conceded a 0.5 pp pace. Estimates shifted towards 0.25 during the week of silence. However, our rules dictate that we do not make any signals during the week of silence.

Nevertheless, when the Board of Directors discussed the issue, we revised forecast prerequisites considerably, as you can see. We believe that pro-inflationary risks triggered by oil prices will abate next year. The previous meeting was held in October. At that time, no agreement was reached and we assumed that pro-inflationary risks may arise if the agreement was not extended. Subsequently, this could have increased inflationary pressure in the economy. These risks abated. Therefore, it is important for us to make the adjustment now. I am not only referring to path adjustment, but adjustment of the level to reflect the new environment has been important for us, and it is crucial that we explain why we are taking such steps to the market.

By the way, the 0.5 pace, in our opinion, fits with a smooth easing of monetary policy. We have already said that 0.5, 0.25 and pauses are possible. And when we say that further reduction will be smooth, we really see room for some decrease, because we are approaching a neutral policy. Let me remind you that the forecast neutral policy level was estimated at 6-7% (key rate reading). As we are approaching these readings there is still some potential for policy easing. It will be smooth. Let me repeat that both a 0.5 and a 0.25 pace are possible. And, as I have already said, it is highly likely that there will be pauses.

QUESTION from TASS Agency:

Good afternoon. Have you revised your 2018 outlook? Will you revise the volume of loans to the economy for this year? This is the first question.

Second. Some experts believe that on a three-year horizon the year-end inflation target will be overshot rather than achieved. Do you see such risks?

Thank you.


We have indeed revised our forecast of loans to the economy. Whereas the September baseline scenario predicted a 5-7% growth in loans to the economy in 2018, this forecast has now been revised to 8-11%. We have also added 1 pp in our 2019 forecast, also bringing it to 8-11%.

Regarding the inflation forecast for the next year-end, our estimates suggest, I repeat, that in the first half of the year it will stand at about 3% and may fall below 3%. This will depend on the base effect of this year, 2017. However, we estimate that inflation will near 4% by the end of 2018.

Therefore, we forecast inflation of roughly 4% for the year-end.

QUESTION from RIA Novosti:

Ms Nabiullina, you said that the equilibrium key rate of 6-7% may be achieved in 2019. Or by 2019. Given the dramatic 50 bp pace you have taken today, can we expect the equilibrium to be achieved earlier?

And my second question, if I may. How could serious recapitalisation through the banking sector capitalisation fund affect the macroeconomic environment? Could it influence, for example, the inflation rate?

Thank you.


I will confirm our previous estimates. We said that we would achieve the equilibrium 6-7% rate within one to two years. We stick to this estimate. It remains unchanged. Everything will depend on the movements in economic development and inflation.

Regarding the impact of bank recapitalisation on the macroeconomic environment, we have indeed made such estimates. These estimates remain unchanged - the impact of the recapitalisation on both inflation and rates is minimal. This is effectively confirmed by the facts. We hardly see any impact now.

QUESTION from Reuters:

Your press release does not mention sanctions among the possible medium-term risks. Could you please tell us if you have considered this possibility (the February report is meant to be dedicated to this issue)? I mean sovereign sanctions. Analysts are forecasting that they may be a shock for the Russian economy, and could cause the ruble to crash.

At the same time, your Monetary Policy Guidelines say that the Bank of Russia may raise the key rate at some point. Have you considered the possibility of a rate hike in the case of economic shocks?

Could you also please specify this year’s capital outflow? What revisions have you made to the forecast?

Thank you.


Our press release says that we are considering the possible impact of external factors. There are various factors, including geopolitical ones.

In the baseline scenario we assume that sanctions will remain in place. However, we are certainly taking such a possibility into account, we are making estimates, some of which we release. You may remember that our review of financial market risks featured special boxes about the impact of different restrictions.

Certain markets may see a rise in volatility. However, we believe that this will prove to be short-lived because the Central Bank is equipped with all the instruments to prevent any increase in risks to financial stability.

Furthermore, from the perspective of monetary policy, moderate tightness allows us to respond to external shocks of any kind without increasing the key rate.

Mr Dmitriev, what outflow do we forecast? Could you please remind us?


29 billion US dollars.


29 billion US dollars.

QUESTION from TASS Agency:

Thank you very much. Mrs Nabiullina, will you update the value of liquidity surplus for this and next year because of the three banks that the FBSC took charge of?

May I ask another question? It was reported that the Bank of Russia intended to provide a financial instrument to develop and build infrastructure for fruit and vegetable storage. What kind of instrument is that?


Liquidity surplus is largely affected by growth in budget expenditure, especially at the year-end. We take the estimates of the Ministry of Finance into account, but we bear in mind that they are rather volatile at the end of the year. This may be the key factor.

Certainly we take into account liquidity provision through other channels, and we regularly update these forecasts, so all these factors are registered.

In regard to financial instruments, the development of financial instruments for developing vegetable storage infrastructure often raises eyebrows as to why the Central Bank is engaged in this area.

The logic behind this is that sustainable inflation reduction and neutralisation of our monetary policy, that is a real shift from moderately tight to neutral monetary policy, need lower inflation expectations. However, we can see that inflation expectations are susceptible to fluctuations triggered by current prices.

These are primarily utility rates and fruit and vegetable prices. Thus, the volatility of fruit and vegetable prices ultimately affects our policy. Furthermore, we see the possibility of developing this infrastructure without the use of budgetary funds but using resources accumulated by non-governmental pension funds.

These projects are natural for non-governmental pension funds. They are reliable and potentially effective. Let me remind you that two years ago a corresponding law was adopted. We were ardent supporters of this law, which provides us with such possibilities. We are now waiting for the Government resolution that would determine the criteria for such investments and after that the instrument will be put into practice.

QUESTION from Interfax:

Could you specify the 2018 GDP forecast? You said that the Bank of Russia’s press release noted that growth estimates had been revised upwards. You said these would be comparable to the 2017 rates. Would it be correct to believe that you expect them to range between 1.7 and 2.2% in 2018 or do you expect this range to be narrower?

My second question concerns specialised refinancing instruments. The Bank of Russia announced they would be withdrawn. Could you please specify what credit limits you would start with? Will these be loans to support SME? Will they be modified somehow in 2018 or will you use some other instruments instead? We would like to see a clearer picture.

Thank you.


Thank you very much. Our forecast for 2018 stands at 1.5-2%. In 2017 we really forecast 1.7-2.2 but now it is closer to the lower bound. It is hard to predict to the nearest tenth of a degree even for this year, let alone for 2018; we have therefore given this range.

Regarding specialised refinancing instruments, our policy is aimed at a gradual smooth withdrawal of these instruments because they were developed and their volume was increased as an anti-recessionary instrument in our policy. The rates of withdrawal will vary across instruments. We have almost stopped increasing limits on these instruments. In every field we work together with the relevant agencies to combine our efforts in relation to certain instruments. We are following a strategy of smooth withdrawal. The most considerable progress is really seen in the field of small and medium-sized businesses. These instruments are substituted, among others, with fiscal support. We are reconfiguring such instruments. We will have a policy for each line of business. We are ready to be flexible and will proceed depending on the state of the economy and its needs in order to avoid any abrupt shocks. We will move smoothly and gradually, but nevertheless we are moving towards a decrease.

QUESTION from Kommersant:

Has the Board of Directors discussed the release of a rate cut forecast schedule in 2017? If not, what are the arguments against making such a decision?


At various meetings we at the Central Bank discussed the possibility of releasing such schedules - with confidence intervals - for the key rate, because we see that market participants really want our policy to be more predictable.

For now, this discussion convinced us that we should provide this predictability by explaining the logic behind our decisions and the factors we took into account. Some of them have ambiguous dynamics. Market participants need to realise that as well.

However, as we are only at the beginning of inflation targeting, we can see that market participants take even these rate forecasts as our obligations. This may give incorrect signals, that is, create wrong expectations. Let us assume that we come up with a forecast, but factors call for other decisions within the confidence interval. This may lead to inadequate perception of signals by economic agents and companies. They would base their plans on the Central Bank’s obligations. Thus, we decided not to do that for now. However, the issue is open for discussion. As we begin to communicate our policy more effectively, we do not rule out the possibility of releasing such information. It’s too early right now.

QUESTION from Bloomberg:

A question leading on from my colleague’s question, if I may. You said that you have all the possible instruments to reduce volatility if sanctions are imposed on sovereign debt in February. Some analysts think that the Bank of Russia could buy Russian bonds to support the market.

Do your instruments include this solution or have you ruled out this option entirely?

Thank you.


No, we have not ruled out this option, but we do not think that we would find it reasonable to apply this instrument.

QUESTION from RIA Novosti:

Has the Bank of Russia calculated the contribution of ruble appreciation to inflation reduction?


Certainly, we have calculated that. We consider ruble appreciation along with a good harvest in 2017 to be temporary factors. We hope that in 2018 we will have just as heavy a crop, but at the moment the 2017 harvest is a temporary factor. Certainly, we have calculated the impact of these factors on inflation. Our estimate suggests that the impact of ruble appreciation on inflation in 2017 stands at roughly 1% or slightly below 1%, while that of the 2017 harvest is below 0.5%.


I have the following question. You must know that Aleksei Ulyukaev, former minister for economic development, was sentenced to 8 years in prison today. What do you think about this verdict? I realise that my question is off the topic, but I would like to hear your opinion as a key public official.

Thank you.


It is off the topic. Colleagues, do you have any other questions regarding monetary policy? Please, go ahead.

If there are no other questions, thank you for your time.


Thank you.