Statement by Elvira Nabiullina, Bank of Russia Governor, in followup of Board of Directors meeting 16 June 2017
Today the Bank of Russia Board of Directors decided to reduce the key rate to 9.00 p.a.
Let me set out in further detail factors that were central to our decision.
First, inflation has virtually been at target levels since the start of the year 2017. It is estimated at 4.2%, as of 13 June.
Price movements are increasingly homogeneous across various regions and commodity groups. This suggests that the slowdown in inflation has become more sustainable. This trend is confirmed by core inflation data, more resilient to the impact of one-off factors. Core inflation was 3.8% in May.
A recovery in consumption is becoming progressively more visible. Households are moving to realise deferred demand for durable goods (household appliances and cars). Importantly, households are largely increasing their spending from current incomes rather than from accumulated savings or credit. This is enabled by the moderately tight monetary conditions. Consumer demand continues to exert a disinflationary effect.
Households have nonetheless been saving less out of their current incomes. This is evidenced by a slew of data including those indicating slower growing deposits. At this point in time, this is understood to be a natural trend considering the ongoing economic recovery. We intend to watch these developments carefully, given the potential inflation risks involved.
Second, lower inflation expectations help us anchor inflation close to the target level. As regards households, their inflation expectations touched a new record low in May; however, they are still heightened at 10.3%. Analysts expect on-target 4% inflation in both 2017 and 2018. According to short-term surveys of companies, regularly conducted by the Bank of Russia, corporate inflation expectations are also down; yet they are invariably heightened.
Households’ inflation expectations have yet to show a sustainable downward trend. The way households tend to perceive inflation is determined by, beyond current price movements, price growth over the previous months or even years. This is why we are now increasingly focused on the average annual inflation level for the past 12 months. This value is calculated as an average of the twelve recent annual inflation indicators. This is currently 5.6%. This is to say, inflation having closed in on 4% is seen as an early accomplishment and remains to demonstrate sustainability. As inflation stays close to 4% every next month, the average annual inflation reading will be moving close to this level. It is only at this point in time that we could say that our inflation is low at 4%.
Beyond overall price movements, household inflation expectations are impacted by price fluctuations in individual commodity groups. These are primarily food prices with their inherently higher volatility. And, this impact is asymmetrical in nature. Households tend to take notice of growth in prices, more than their decline.
Lower imports in the food consumer basket help reduce the exchange rate effect on prices. Yet, as import substitution unfolds, intra-year price fluctuations may intensify given the expressed seasonality of Russian agricultural production. Surges in food inflation are most heavily felt by consumers and could undermine the sustainability of the trend towards lower inflation expectations. This is the area where additional government support is needed to develop the appropriate infrastructure, principally, to provide for transportation, storage, processing and sales of agricultural products in order to reduce seasonal price volatility.
Third, the pace of economic recovery has exceeded somewhat our expectations. However, the medium-term outlook for economic growth remains unchanged.
Rosstat’s data suggest that annual GDP growth accelerated in the first quarter. The increase in industrial production and rebound in investment continued. The number of regions displaying production growth increased compared with the last year.
We expect GDP to grow 1.3-1.8% this year. This projection is slightly above the previous baseline forecast. However, we still consider the oil price to stand at $50 a barrel in 2017, given the current price movements and the oil market outlook. The reason behind the upward revision of GDP projections is a somewhat faster-than-expected economic rebound since the start of the year, which came with improving business sentiment.
We still assume that the oil price will draw back to roughly $40 a barrel in 2018-2019. We do not expect it to considerably affect economic growth given that the economy has already largely adjusted to low oil prices.
As for the balance of payments, we forecast the current account to stay in positive territory at about 1-2% of GDP. Amid the floating exchange rate regime, capital outflow and current account movements will be mutually balanced depending on changes in the international reserves.
Our baseline scenario provides for medium-term economic growth of about 2% given the structural constraints. Growth prospects will increase as the governmental structural policy is implemented. We will be able to consider their impact our forecasts when specific decisions are taken.
Fourth, medium-term inflation risks remain in place. They are as follows.
The external economic situation will likely remain unstable, as confirmed by the volatility of oil prices. We do not rule out that [oil] production in the US will grow and other countries, which are not parties to the agreement, will expand their supplies to the global market. Demand-side risks are also in place. They result from a likely slowdown in the Chinese economy, as well as the development of energy-efficient technologies and alternative energy sources.
As before, our press release traditionally lists another two risk sources - the inertia of inflation expectations and possible fiscal policy revisions.
However, new inflation risks have recently become more evident.
We take into account that increasing consumption and lower propensity to save are natural at this stage. Inflation risks will grow if these processes unfold too fast and outpace the expansion of production. Then inflationary pressure will increase both on domestically produced and imported goods. This will result, among other things, from the exchange rate movements, given that the increased consumption will largely be met through imports.
Unemployment indicators have been relatively low in recent years even as production decreased. Joblessness is in decline. Some segments are already seeing labour shortages. Their aggravation may have two effects. The direct one is the productivity of labour lagging behind the wage growth. The indirect effect is a decline in growth potential due to the impossibility of attracting required specialists to expand production and set up new businesses.
In order to constrain these risks we need not only monetary but also structural policy measures.
To conclude, I would like to reiterate that inflation slowdown to roughly 4% is only the first, though a very important, step towards ensuring price stability.
At this stage, our objective is to anchor inflation close to this level, push inflation expectations further downwards and make them less responsive to unfavourable factors and risks.
It is important that we could build confidence of all economic actors in our capability to anchor inflation close to the 4% target for a long period of time. Therefore, our approach to key rate cuts will remain balanced and prudent.
Question and answer session with the media
QUESTION (Interfax):
I have two questions. My first question is related to the Central Bank’s previous release, in April, where it is indicated that the reduction of the interest rate is occurring in accordance with the expectations and extent projected by the Central Bank. But the Central Bank has not voiced what you might call guidance. In a related question, can you offer that at year-end? What may be the potential interest rate reduction? And does the Central Bank have any plans to publish its long-term forecasts on movement of the key rate, as central banks of other countries do?
And my second question is related to the increase in the Federal Reserve’s interest rate. Some experts believe that this may lower the attractiveness of carry trade operations in certain developing countries. Do you see any related risks for Russia and, in particular, risks that the ruble exchange rate may weaken?
E. NABIULLINA:
Thank you very much. Regarding the publication of our forecasts for the movement of the interest rate. First, not all central banks do this, though some do. We are currently discussing the possibility. But, in our opinion, before starting to publish the forecasts, whether they are medium or long term, with confidence intervals, we need to do certain information work and preparation so that this forecast would not be interpreted as a strict obligation of the Central Bank, that we will proceed within these bounds. Because, after all, our interest rate decisions are taken based on analysis and current dynamics, and forecasts that can change. Life changes. And that is why, in our view, before publishing, we must prepare public opinion for this kind of forecast. We are working on it now.
As regards the increase in the Fed’s interest rate. Well, first, we can see that the Russian market’s reaction was fairly muted, though oil prices were falling at the same time. I must say that there was also a muted reaction to the Fed’s previous decisions to raise interest rates.
Now, as for the possible influence on carry trade volumes and potential influence on the ruble exchange rate. First, we saw marked investment growth in what we call carry trade, the peak being in March. In April and May we saw it begin to drop. It is practically the opposite now, here non-residents are gradually leaving the ruble. There are no large movements of any kind here, and, besides, the overall accumulated carry trade is not that large. If you look at the indicators for non-resident investments and non-resident subsidiaries through organised markets in federal loan bonds (OFZs) and corporate bonds, it totals, perhaps, around 7 billion US dollars. That is not particularly significant compared to the volume of the currency market. We do not expect there to be any major changes leading to abrupt changes in the exchange rate.
QUESTION (Bloomberg News):
At the end of the release, you brought back a phrase that had not been used in a while. It was: ‘taking these factors into account, enduring moderately tight monetary conditions are necessary for a lengthy period of time’. Does this mean that you currently expect it to be longer than 1.5-2 years, which you mentioned earlier? Or some temporary period?
And a few more, if I may. Currently, the US is discussing the imposition of sanctions, tougher sanctions against Russia and, among other things, the sovereign debt is mentioned. Do you see any related risks for our financial market, particularly the debt market, because the share of non-residents is fairly high?
And, if I may, a third question regarding the possibility of the Bank of Russia resuming replenishment of its reserves. You have always said that this is contingent on reaching an inflation rate of 4% and financial market stability. These conditions have nearly been met. Is it possible that the Central Bank will begin replenishing reserves this year? Thank you.
E. NABIULLINA:
Thank you. Even if in press releases we do not always mention that we maintain a moderately tight monetary policy, we do mention it practically everywhere in our presentations because we believe that, at this stage, it is a necessity. It will remain so even if the key rate is lowered.
We believe that we must maintain this moderate tightness for some time. To say exactly how long it will be—1.5-2 years, perhaps more or less—it is impossible to determine a precise date. Why? Because this mostly depends on how fast we lower inflation expectations and, most importantly: anchor them. When we are sure that they are anchored and inflation expectations will not change dramatically during some temporary shocks, then we can transition to the neutral interest rate that we have also determined. The real rate is 2.5-2.75, and if we consider the nominal rate at 4% inflation, then it is 6.5-6.75.
But in our view, this will take several years. Thetis the policy we are going to pursue. Let me repeat. However, we do not rule out that the interest rate may gradually fall, because at the moment our key rate is higher than this neutral one.
As regards the tightening of the sanctions. We do not see any great influence on the financial market due to the tightening of sanctions. Actually, in our view, the effect of the sanctions imposed earlier has practically worn off. As regards the influence on banks. Yes, it is anticipated that loan periods will be reduced for Russian banks from 30 to14 days. We do not see any large risks for the banking system here.
As regards the debt. It is unclear what is proposed and if anything will be proposed. But, in our view, if this affects new investments in Russian federal loan bonds (OFZs), I do not think that it will be a big issue for the Ministry of Finance and overall for the economy, because we do not have any big plans to build up the national debt. And there are investors who are very interested in this debt, because it is attractive. And should federal loan bonds be banned and should they be sold out of portfolios, these losses would be first and foremost for those same companies who invested in them, above all those same American and other companies who would have to sell them off on the cheap. I think Russian participants in the financial market would, in that case, be only too happy buy those assets.
And as regards the possible increase in reserves. I will repeat that, at the moment, we find the reserves sufficient in all respects. But it would be useful to reinforce our safety net in favourable conditions and keep building up our foreign-exchange reserves. And we reaffirm that we are not going to do this at our own expense, not placing our inflation target of 4% at risk. And our goal is not just a one-off achievement – our goal is to maintain it at this level for a long time. That is why we cannot confirm that we have definitively reached our inflation target.
As regards the financial markets. They are indeed fairly stable, but nonetheless, as I already said in my presentation, we are seeing medium-term risks due to oil prices, among other things. Certainly, we must take them into account. This year, we consider these kinds of purchases to be unlikely and, in the baseline scenario, we are not pricing in the Bank of Russia’s purchase of foreign currency, that is, further replenishment of the foreign exchange reserves, in addition to the Ministry of Finance’s activities.
QUESTION (RIA Novosti):
Mrs Nabiullina, I have a question regarding today's meeting. I would like you to clarify: was the decision made on the 0.25-point reduction of the key rate unanimous? And one more question about the meeting: was a change in the target format discussed today? Because it was said that, possibly, at today's meeting some kind of new format without a change in the 4% value would be discussed.
And a second question, specifically regarding the GDP. Today, you stated that the 2017 forecast has been raised. Recently, the Minister of Economic Development stated that 2% GDP growth might be reached by autumn. I would like to know what GDP forecast the Central Bank has for the third quarter. Thank you.
E. NABIULLINA:
Thank you very much. The decision on the interest rate was adopted unanimously today. Today, we did not discuss changing the format of our objective, the target format. Though this topic exists and we routinely discuss it. Why? Because many countries’ experiences demonstrate that targets are sometimes determined as a specific point, sometimes as a range. In our opinion, we should not yet determine the range until we have maintained the 4% target.
But nevertheless, we are fully aware that inflation cannot remain at 4% every day, every week, and every month; it will sometimes be higher, sometimes lower. And here is where the issue is rather less about the identification of a target, which seems secondary to me, while the primary question is whether or not to react with monetary policy measures to these sorts of deviations, and which deviations should be the basis for such a reaction. Because assuming these deviations may be significant but short-term, when we see that the shock factor, the risk of changing prices on certain kinds of goods, this shock has worn off and, most likely, the prices will return to their previous levels, and there won’t be secondary effects due to inflation expectations, that is, that this will not extend to a wide range of goods, then, evidently at that point, monetary policy should not react at all.
And if one-time shocks lead to lengthy deviations from the target, then we should certainly implement monetary policy measures. That is why for us, now, discussing of this kind of reaction is perhaps more important, because we really are practically at the target and now we must consider how to react to such deviations, the scale and character of these deviations. This is what we are going to discuss.
As regards the GDP, we did slightly raise our forecast, but nonetheless it is somewhat below the Ministry of Economic Development’s forecast. And as for the third quarter: around 1.3.
QUESTION (TASS):
Mrs Nabiullina, would you please comment on recent reviews in which Central Bank experts indicated that bad weather might have a short-term negative effect on inflation? Right now we are witnessing abnormally bad June weather. Can this effect be more apparent?
And a second question, if I may. Have data on capital outflow changed, since you have somewhat revised your forecast?
E. NABIULLINA:
Thank you very much for the question. As regards the bad weather. As I already said, we usually recognise traditional risks related to the harvest. Certainly, we are concerned by seasonality and prices related to the harvest. For this reason, seasonality must be reduced, and we are witnessing this, by the way, in some goods. In certain regions where greenhouse farming is being developed there are more stable prices on certain kinds of goods. For this reason, it is worth mentioning once again that the development of agricultural logistics is very important for price stability.
As regards this year overall. It’s hard to say at the moment what impact the bad weather will have, whether it will have an impact on harvest volumes or if it will be a delayed seasonality: the harvest will be gathered later but in the same volumes. It is too early to draw conclusions, but many experts have said that, most likely, this will be a seasonal shift. Nonetheless, we have taken these risks into account in the decision-making process—I also spoke about this earlier—as short-term risks.
As regards capital flows. It is important to refer to capital flows as a balancing item in the current account balance. We have a floating exchange rate and we must bear in mind that changes in the foreign exchange reserves and the current account balance must be balanced by capital outflow. And you are aware that many countries that are major exporters with sizeable current accounts often also have large amounts of so-called capital outflow. We can see this in the cases of Germany, Canada, and Norway. Namely, this kind of capital outflow must be distinguished from questionable capital outflow.
Nevertheless, our forecast on the net outflow of private capital is as follows: around $19 billion in 2017, $11 billion in 2018 and $14 billion in 2019. But a lot will depend on the current account balance.
QUESTION (Reuters):
I also have a question about the current account. Many analysts expect it to turn negative in June due to dividend payments. Do you foresee any related risks for the ruble exchange rate?
And the second question. Mr Volodin invited the Central Bank to send a request to the US Federal Reserve regarding the state of the American economy, as most reserves are invested in dollars. Will you follow this recommendation? And, in general, have you previously consulted the Federal Reserve regarding the security of foreign currency reserves in Russia?
E. NABIULLINA:
Thank you. Our current account is not constant; it has a marked seasonality. You are aware that it is typically stronger in the first quarter, and then it weakens slightly. We are talking about what the current account will be on an annual basis. We estimate that it will remain positive for all three years, though its volumes will gradually decrease. This year we anticipate a current account of around $37 billion, a positive balance, above $14 billion and $8 billion [in 2018 and 2019 respectively – Ed.].
As regards our foreign currency reserves. I do not recall that we received such a request. But for us, the preservation of foreign currency reserves is a priority. Certainly, we take all decisions on the basis of preserving foreign currency reserves: taking into account the structure of these reserves, the currencies, etc. And we possess all information necessary in the decision-making process.
QUESTION (Russia 24):
Mrs Nabiullina, when it comes to the revocation of licences, recently there has been what you might call a lull. Has the banking system stabilised for the moment? Thank you.
E. NABIULLINA:
Our press conference today is dedicated to monetary policy. But if this question has come up, I will take it. We will continue a policy of banking system recovery. We are seeing continuing problems of a non-systemic nature. Even those revocations of licences in previous years affected a fairly small part of the banking system assets. Nonetheless, the existence of weak players is certainly harmful to the entire financial system and reduces confidence in the financial system.
For this reason, we will continue this policy at the rates derived from the real conditions of financial institutions. We will surely change regulation and counteract current and future risks. We will carry on.
QUESTION (Bloomberg):
If I may just ask you to clarify. What will lead to an increase in capital outflow this year? Thank you.
E. NABIULLINA:
I already said that this amount is projected and really subject to fluctuation. It is related to our updated forecast of the current account balance. We changed the current account balance slightly; both our exports and imports slightly increased. And this was reflected in the balancing item: capital outflow. In addition, we considered the Ministry of Finance’s operations for the replenishment of foreign currency reserves and the return of foreign currency refinancing.
QUESTION (RIA Novosti):
Mrs Nabiullina, will you change your forecast for banking sector profits due to the fact that they are continuing to increase at high rates? And, regarding lending – have you also revised the forecast upward?
And a second question, if I may, on the long-awaited issue of who will lead the managing company of the Banking Sector Consolidation Fund. Perhaps, if there already are candidates, you would name them? And when will the first bank resolutions be? We are still awaiting that as well. Thank you.
E. NABIULLINA:
We are not really expecting an increase in the number of bank resolutions. We would prefer fewer resolutions and revocations of licences. We will announce the appointment after the decision is taken. But at the moment we are doing everything so that the managing company will be ready to participate in the resolutions, should that decision be necessary be taken.
As for the situation in the banking sector. The banking sector is indeed stable; its indicators are recovering, and profits are recovering. In nominal terms, the profits now roughly correspond to 2013. I will point out that this is in nominal terms, during this time we had high inflation, which is why in real terms it has still remained slightly lower the 2013 figures. In fact, I will remind you that the profits of non-financial organisations grew throughout these years; they did not fall, like those of the banking sector, 4 times, 5 times, and then recovered.
The profits of the banking sector: why is this indicator important? This is, first and foremost, a source of capital, and capital is the basis for expanding lending. That is why there is already capital stock to expand lending in the banking system; we can see this. Plus, there are profits that can increase capital and can increase this stock to expand lending.
In our opinion, the main question is borrower risk. And we see that banks justifiably have begun to expand lending specifically for reliable borrowers. And we support an approach where lending must be high quality; bad debt should not grow. And the banking system must support effective projects and effective production, which are emerging right now.
We have not changed the overall forecast for lending growth in the banking sector: somewhere around 5-7% this year.
QUESTION (Kommersant):
One question. Which proposals for changing the credit rating are in your three-year forecast? And what may change due to the potential increase in the credit rating in your forecast?
E. NABIULLINA:
We honestly did not introduce any changes, and did not consider changing the credit rating in our forecast. In general, we take a conservative approach to all indicators. But if the rating is increased, and there are grounds for it in my view, then it can raise the overall investment attractiveness of Russian assets, and the ruble. But in any event, I think that if this happens, it will happen smoothly, and it will be a positive change for our economy.
QUESTION (Interfax):
You spoke of retaining the forecast for lending growth at 5-7% for this year. What are your projections for the growth of deposits, taking into account that their attractiveness, as the key rate and interest rates in the economy come down, essentially lowers? And there are alternative sources for the public, such as individual investment accounts or federal loan bonds. How much, by your estimation, could investments grow this year?
E. NABIULLINA:
In our view, investment growth paces are indeed falling and they may become lower than lending growth rates: we could say, perhaps, 2-4%. But what ’is the important thing. So long as deposit interest rates, real deposit interest rates, remain positive and, in our view, deposits are attractive to the public. But I already said that we view deposit interest rate dynamics as a risk, as they can influence the propensity to save.
Banks are essentially also studying this, as it is a very interesting passive base for them. And it is unlikely that they will lower deposit interest rates at a pace that would lead to a reduction in the deposit base. On the whole, they are not interested in that.
QUESTION (Rambler News Service):
In the Financial Review of the first quarter, the regulator noted that it might consider the question of improving monetary policy instruments due to the expanding role of non-bank financial organisations. Exactly which instruments are being referred to? How will they be improved? And when will it be possible to use them? Thank you.
E. NABIULLINA:
This is more of a theoretical task for the long term. We are constantly striving to improve our instruments, though, in our view, the set of monetary policy instruments has largely been established, and it allows us to achieve monetary policy objectives. In our view, the transmission mechanism is working well for the structure of our financial system and the structure of our economy.
But the role of non-bank financial institutions is growing. We are now just discussing what, in the long term, must be changed and how. We are not yet ready to talk about specifics, much less decisions. Thank you.
QUESTION (Reuters):
I would like to ask if there is an increased possibility of a pause in the easing of monetary policy? And do you assume that there will be pauses, even lengthy ones, at the end of this year? Thank you.
E. NABIULLINA:
Thank you. We expect pauses if the risks we spoke of earlier occur. We do not have pre-defined steps: it can be 0.25 or 0.5. And we assume that we can take pauses for more than one session if risk assessment, particularly of medium-term risks, demonstrates a heightened possibility of their occurrence.
But if we compare this with the past, we have not yet seen an increased likelihood of pauses. Well, perhaps it has remained on the same level. Thank you.
QUESTION (RIA Novosti):
At the beginning of June, First Deputy Governor Yudaeva stated that the Central Bank is developing new macroprudential stress tests. I would like you to clarify: what makes this necessary? Is the Central Bank perhaps anticipating some macroeconomic shocks? And has it been determined which parameters will be used to inspect banks? Thank you.
E. NABIULLINA:
You are aware that we already have stress testing for individual banks. And not only banks: we recently launched it for non-government pension funds. It is standard practice to run individual stress tests. And now we are using stress testing for the entire financial system. Why? Because financial stability issues are also the responsibility of the Central Bank. These are systemic risks.
Here, individual stress testing is insufficient, so, in the event of shocks, we must determine what their cross-sector distribution may be, taking the links between different financial institutions into account. We know that sometimes they are quite close. In this case, in order to reveal vulnerable areas and, if necessary, take macroprudential measures, to prevent systemic shocks: it is a kind of preventative work based on early warning of the emergence of systemic risks.
QUESTION (Bloomberg):
Would you clarify, please? In April, it was stated that the overall potential of an easing of monetary policy was unchanged. So, as of June, do you affirm that assessment? Or has the potential for easing and its extent changed?
E. NABIULLINA:
In general, it has not changed at all.
Thank you.