Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 20 March 2020
Today, the Board of Directors has decided to keep the key rate at 6.00% p.a.
Since the time of the previous Board of Directors meeting, the situation has changed drastically — primarily in the global economy, and in world commodities and financial markets. Currently, events are evolving according to a scenario different from the implications of our baseline scenario at the beginning of February.
I would rather say that today’s Board of Directors was quite non-typical. First, we considered and weighted multidirectional options of the key rate decision. Second, in addition to the key rate decision, we adopted a whole range of measures aimed at maintaining financial stability, supporting households and business, and providing credit to the economy amid the coronavirus pandemic. With today’s meeting not being a core one, this is exactly why we are conducting this press conference, where we want to clarify our assessment of the situation and the decisions made.
First of all, I would like to talk about the nature of the current events and the peculiarities of their impact on the Russian economy. This, to a large extent, determines the logic of our decisions and measures taken.
The situation today is really complicated. Throughout the world and in Russia. The coronavirus pandemic and measures taken to contain it exert pressure on the global economy, which simultaneously reduces both output and demand, and influences the behaviour of businesses and households. Volatility in financial markets has surged. The pandemic developments were accompanied by a profound drop in oil prices caused both by a considerable increase in oil production and a considerable decline in its consumption.
Uncertainty and concerns about further developments in the coronavirus situation may trigger a local elevated demand for individual durable goods and goods with extended storage periods. Though not able to produce long-term consequences, this makes price dynamics more volatile and may eventually bring about an increase in inflation and inflation expectations. Further ahead, in contrast, demand may weaken, thereby producing a downward influence on the consumer price growth rates.
In turn, the slowing of the global economy made investors abandon risky assets. This exacerbated the volatility of capital flows and fluctuations in global financial markets, and raised country risk premiums. Coupled with a sharp drop in oil prices, global volatility dragged heavily on the Russian financial market and led to the ruble depreciation. All this will have a proinflationary effect and may feed through into inflation expectations.
Besides, a fall in the prices of financial assets and an increase in yields in the Russian debt market has been observed. Special attention shall be given to ensuring financial stability.
Therefore today, when making our decision on the key rate and the package of measures to support lending, we proceeded from the comprehensive estimate of all these factors, from the balance of risks to the economy and inflation, and from concerns about ensuring financial stability.
As for the key rate, I have already mentioned that we considered three options, which we do very rarely, namely: to cut, to raise or to leave unchanged.
Our understanding of the
However, the balance of short-term risks has shifted towards proinflationary ones. Influenced by the weaker ruble, inflation this year will not only get closer to the target faster than previously anticipated, but may temporarily exceed it. It is obvious that the dynamics of financial markets and the risks of a possible further decline in oil prices affect inflation and devaluation expectations. This makes it important not to allow the inflationary spiral to whirl up. Higher interest rates are advised to stabilise expectations. Besides, we understand that amid elevated volatility in the financial market, our monetary policy decision may also affect financial stability. If we consider these factors alone, a decision to raise the key rate would be appropriate.
The decision, that we made, to keep the key rate unchanged, in the current environment balances the impact of short-term and
As for the signal for the future, we will continue to use the same logic when making decisions by assessing each time the balance of factors and the balance of risks associated with making decisions on a case-by-case basis.
I would like to reiterate that the key rate decision has been made in conjunction with other Bank of Russia measures aimed at mitigating risks to the economy and supporting our citizens in difficult conditions.
The Bank of Russia is now introducing a broad range of additional measures to supplement the initiatives already adopted.
These measures, in the first place, are designed to ensure financial stability and maintain the financial sector’s ability to provide loans to the economy, especially to those individuals and businesses who are especially vulnerable in this situation. These measures will support lending to small and medium-sized businesses, mortgage lending, and help protect the interests of the citizens who suffered from the coronavirus outbreak. We understand that both financial institutions and borrowers will need some time to adapt to the new environment. That is why we took measures to strengthen the capacities and abilities of banks and other financial institutions to restructure and prolong loans to households and enterprises impacted by the pandemic. We will make on-line payments more accessible for households and support on-line retailers.
Besides, we work closely with financial institutions, and no matter what happens next, the smooth operation of the financial sector and the accessibility of financial infrastructure will be ensured. Other countries have already experienced this, and we build on that experience. We have developed respective recommendations; we give individual attention to major financial institutions and cooperate with financial market associations and self-regulatory organisations, keeping track of how they develop and implement respective measures. To facilitate transition to remote work mode for employees, we seek to temporarily relax reporting requirements. We have also temporarily suspended inspections excluding cases that require immediate response.
It is worth noting that unlike key rate changes, whose pass-through on the economic processes comes with a certain time lag, regulatory easing has a faster and more targeted effect, much needed for timely and preventive influence. In addition to mitigating financial stability risks, the implemented measures will curb the unfolded tightening of internal monetary conditions amid global volatility.
We are working closely with the Government to be able to ensure real-time information exchange, to develop comprehensive measures (if need be) — in order to alleviate the impact that negative factors may have on households, the economy and the financial sector.