Alexey Zabotkin's press conference speech: Monetary Policy Review consultation paper
Good afternoon,
Today, we have published the Monetary Policy Review consultation paper for the period of inflation targeting.
The Bank of Russia’s monetary policy is focused on maintaining price stability, including for enabling balanced and sustainable growth.
To this end, the Bank of Russia has maintained an inflation targeting regime since 2015. The transition to this new monetary policy strategy occurred during a challenging period in the country's history. In the second half of 2014, Russia faced a steep deterioration in external conditions as oil prices dropped, Russian companies and banks were hit with sanctions, the ruble weakened sharply, and inflation accelerated. By March 2015, annual inflation had accelerated to almost 17%.
Despite the extremely difficult circumstances, the Bank of Russia unveiled a commitment to reducing annual inflation — growth in the consumer price index — to a target of 4% in 2017 and maintaining it close to this level going forward. At the time, many cast doubt on whether this commitment was realistic, but it was indeed met, with annual inflation having decelerated to 4% by July 2017. The average annual rate of inflation for all the months of the five-year period between 2017 and 2021 was 4.2%. This is much lower than in any five-year period of Russian economic history.
With the aim of assessing our policy outcomes in the inflation targeting period and developing recommendations for further policy improvement, the Bank of Russia initiated a comprehensive analysis of its monetary policy in the summer of 2021. This analysis is the Monetary Policy Review.
Its first stage was a series of studies by Bank of Russia staff. These studies concluded with several research papers, the full texts of which are available on the Bank of Russia website, along with the consultation paper. Let me emphasise right away that these works, along with any other research papers by Bank of Russia staff, reflect the personal positions of their authors.
The consultation paper, in turn, includes a summary of the results of these individual studies. Like any discussion paper, it features a number of issues on which we seek feedback from the expert community, businesses, consumers, and state authorities. The second stage of the Review involves the public discussion of the findings.
Let me briefly outline the findings and the topics for this follow-up discussion. I present these as six modules, which is consistent with the six research modules in the Review. I will present them in the order they appear in today's consultation paper.
The first is a retrospective study of monetary policy. As I have said, over the five years from 2017 to 2021, the Bank of Russia’s monetary policy ensured that inflation stayed close to 4%. It was certainly beyond the power of monetary policy to prevent the price spike in the spring of 2022, which was triggered by a drastic change in external conditions. Granted, the resolute and proportionate monetary policy response to that hike helped quickly stop a rise in inflation expectations and expectations for devaluation. As early as the second half of last year, price growth declined to a minimum. Since early this year, monthly price increases have been close to 4% in annual terms, seasonally adjusted.
This is much faster disinflation than after the similar inflation spike in late 2014 and early 2015. Also, these conditions enabled a faster reduction of the key rate, which was back to 7.5% seven months after the February increase to 20%. With the lack of the ‘capital’ of confidence in inflation targeting back in
Beyond inflation targeting, the floating ruble exchange rate and compliance with the fiscal rule throughout those three years were key enablers of improved macroeconomic stability.
Second. Monetary policy and financial stability. A policy centred on financial stability has a twofold objective. First, in quiet times, it must hold back the accumulation of risks in the financial system, ensuring that its safety margin is sufficient. Second, financial stability policies are intended to curb the consequences of shocks that could threaten the sustainability of the financial system.
In normal circumstances, the Bank of Russia is committed to the principle of separately using monetary policy instruments and its financial stability policy. Specifically, monetary policy acts through the key rate — through its expected path rather than current value — on the overall monetary conditions and through them on aggregate demand. Financial stability policies aim to ensure that the accumulation of high-risk assets is commensurate with the financial sector’s capital.
At the same time, the Bank of Russia is ready to use its monetary policy toolset to maintain financial stability in crisis episodes. However, if financial stability policy delivers on its first objective — containing the accumulation of vulnerabilities in the financial system — the convergence of policies is needed only for short periods even in crisis episodes. This has been demonstrated by recent crises in 2014, 2020, and 2022.
Having said that, the problems with regional US banks that have emerged in recent months suggest that vulnerabilities in the financial system may be headwinds to the maintenance of price stability. It is important to understand how much of the accumulation of such vulnerabilities is due to periods of unreasonably soft monetary stances. Undoubtedly, these questions are all well worth another look.
Third. Communication as a monetary policy tool. As part of the Review, this module includes five research papers and a summary analytical note. Inflation targeting is often said to be very much about the management of expectations. Therefore, clear explanations of the logic of central bank actions are almost as important for efficient inflation targeting as the central bank’s decisions on the policy rate and the actual policy results. Ultimately, the foundation of trust in monetary policy is the central bank’s ability to keep inflation within the targeted range or quickly return it to target.
This communication module presents a detailed view of central bank communication with both the professional community and the wider consumer audience. We are well aware of the professional interest in the subject and admit that there is room for more details of key rate discussions to be disclosed, and for additional indicators in the macroeconomic forecast of the Bank of Russia, as well as the need for a more nuanced account of current developments in our analytical reports. These public consultations are likely to give us further confirmation that this is the right way forward. In communicating with a wider audience, further efforts will be made to provide more clarity in our public documents for non-professional readers, including through new formats. The improvement of financial literacy is central to these efforts.
Fourth. The format of the inflation target. Understandably, this module has drawn the most attention. It involves the discussion of the inflation target.
The inflation target is a trade-off between, on the one hand, the desire to reduce what may be called the ‘inflation tax’ and to curtail inflation fluctuations — which inflict losses one the economy, businesses, and consumers — and, on the other hand, the need to keep enough room to reduce the policy rate in conducting countercyclical soft monetary policy. The lower the inflation target, the less room there is. Conversely, a higher inflation target involves higher risks of the de-anchoring of inflation expectations.
The analysis shows that, by late 2021, we had accumulated room for a cut in the inflation target. However, the events of 2022 triggered both a hike in prices and a marked rise in inflation expectations, to levels unseen since 2017. They are persistent despite price growth that is markedly lower than at any time since 2017. This leads to the need, first, to stabilise inflation near 4% and to anchor inflation expectations. It is easier to deliver on a lower inflation target when there is a high degree of confidence in the ability of the central bank to meet the current target and when the transition towards a new target are announced in advance.
The Review addresses other aspects of the format of the target — whether it is a point or range, the target in use, and the description of the horizon over which the target is to be reached. To save time, I will cover these in more detail when I answer your questions.
Fifth. The operating procedure for monetary policy. This is perhaps the most technical module in the Review. It discusses how exactly and how effectively the Bank of Russia is able to keep the overnight rates close to the key rate. Contrary to popular belief, the key rate itself is not the rate at which the Bank of Russia lends to banks. It is a benchmark which determines the parameters of Bank of Russia operations for providing or absorbing banking sector liquidity. These operations form the interest rate in the money market, where RUONIA is the key indicator. It is the average RUONIA rate and expectations for its changes in the future that set the structure of interest rates for all other terms.
Therefore, the central bank’s operating procedure should ensure minimal deviations in average money market rates from the key rate. It should also provide for banks with adequate collateral to receive sufficient liquidity to conduct daily operations. The results of past years, including 2022, provide conclusive evidence that the Bank of Russia’s current operating procedure is up to the task. The consultation paper discusses several proposals for fine tuning it. These include the ongoing transformation of the standard liquidity provision scheme and the possible unification of the dates for averaging required reserves for each period with the dates that the Board’s key rate decisions enter into force. We would welcome feedback on these topics, primarily from bank treasurers, who are strongly reliant on the operating procedure.
And finally, module six: New challenges for monetary policy. We discuss several long-term trends that are emerging in both the global economy and in Russia: deglobalisation, climate change (including global warming), demographic trends (including population aging and migration), and mounting inequality. These trends and their implications will be the background for the structural transformation of the Russian economy. In this context, we expect that future supply shocks will be more frequent, impactful, and more pro-inflationary than those before 2020.
This means a more challenging environment for monetary policy, and central banks, including the Bank of Russia, will need to pay more attention to the risks stemming from the secondary effects of supply shocks. Another prerequisite for sustainable macroeconomic stability is a responsible and consistent fiscal policy.
In conclusion, a few words on the coming public consultations as the second stage of the Review. Early discussions of the research took place between April and early May, when we invited academics to discuss the papers that have been published today. We expect that the publication of the papers will set off in-depth discussion of them in the expert community. Public discussions in the regions are scheduled for May—June, to be hosted by the seven main branches of the Bank of Russia. The Review will also be the focus of three panel discussions at the Bank of Russia’s Financial Forum in St. Petersburg in early July.
Based on the feedback we receive in these public consultations, we will summarise the recommendations resulting from the Review in the draft Monetary Policy Guidelines. This draft is to be published in August, and thereafter the State Duma will discuss it. We believe that the final decisions on the improvement of monetary policy and inflation targeting will help deliver sustainable price stability and enable balanced and sustainable growth in any environment.