Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 14 September 2018


The past few months have seen substantially changed external conditions, triggering a strengthening in inflation risks. In an effort to curb the impact of these factors on price and financial stability, the Bank of Russia has made two decisions today.

First. The Bank of Russia Board of Directors decided to raise the key rate by 0.25 pp to 7.50% per annum in order to check inflation risks. I refer to the risks of mounting inflation and inflation expectations in response to exchange rate volatility. We should also keep in mind the forthcoming VAT rise. Moving forward, we will look into how feasible a further increase in the key rate will be, taking into account inflation movements and economic performance against the forecast, as well as external environment-side risks and financial markets’ response.

The second decision is intended to stabilise the financial market. We have decided that foreign exchange purchases in the domestic market, currently being made as part of the fiscal rule, will be suspended through the end of the year. Going forward, we will determine on the need for resumed regular purchases based on our assessment of actual developments in financial markets.

Once such regular purchases have resumed, we will explore the option of relaunching this year's postponed foreign exchange purchases. Having said this, the start of regular purchases may not necessarily be concurrent with the relaunch of deferred purchases. We estimate that the deferred purchases may take longer than one year to follow through.

The suspension of purchases will undoubtedly affect the balance of payments and exchange rate dynamics. We took it into account in our forecast and key rate decision.

The present oil prices are set to take current account revenue to roughly $30 billion before the end of the year, which is double the amount of anticipated external debt payments ($15 billion). That said, at least a half of them are highly likely to be refinanced. Thus, we enjoy the solid safety margin of our current account. In this context, the suspension decision will serve to curtail exchange rate volatility alongside its influence on inflation over the next few quarters.

I will now proceed to elaborate on the factors the Board considered in making the key rate increase decision.

First, inflation risks related to external factors have materialised. This entailed an upgrade in inflation forecast, even with today’s decisions factored in. We expect inflation to range within 3.8-4.2% by the end of 2018 and 5-5.5% by the end of 2019; it is then expected to return to 4% in the course of 2020.

There are a number of reasons behind the deterioration in the external environment. This August saw a change in geopolitical factors, with uncertainty growing over sanctions against Russia. The strengthened geopolitical risks were coupled with capital outflow from emerging markets. Over the course of spring and summer, multiple emerging market economies saw the materialisation of previously accumulated imbalances; this weighed on their financial markets, exchange rates and key macroeconomic indicators. This sequence of events – when more than one country becomes affected – reduces international investor risk appetite and triggers capital outflow from emerging markets in general. This is further aggravated by increased interest rates in advanced economies.

The ruble’s depreciation in August and early September entails a rise in prices of goods and services. The Bank of Russia’s estimate of the exchange rate pass-through effect on annual inflation have remained unchanged at roughly 0.1 (one tenth), that is, a 10% drop in the nominal effective exchange rate adds 1 pp to annual inflation over a three- to six-month horizon. According to our calculations, the nominal effective exchange rate declined by roughly 9% year-to-date and is poised to contribute approximately 0.9 pp to annual inflation.


The Bank of Russia’s forecast suggests that annual inflation will go up from 3.1% in August to 3.8-4.2% by year-end. It will accelerate in the first half of 2019, when the main effect of the VAT rise manifests itself, to be followed by a decline in price growth rates.

The key rate decision, coupled with the suspension of foreign currency purchases in the domestic market, allows restricting a surge in annual inflation in 2019 by 5-5.5%. Inflation is poised to return to 4% in the first half of 2020, when the effects of the VAT rise and those of exchange rate movements are exhausted.

The second factor we took into account is a rise in inflation expectations and high uncertainty over their future movements.

Households' inflation expectations surged in May and remained elevated throughout summer months, while those of businesses continued to mount. The ruble’s depreciation seen in August may push inflation expectations further upwards.

At the end of the year, inflation expectations are also highly likely to respond to the forthcoming VAT rise. Surveys suggest that households have yet to take it into account. Meanwhile, businesses have already factored in the VAT rise in their expectations along with exchange rate movements.

The situation when multiple, rather than just one, proinflationary events are in place – the weakening in the ruble in April and August followed by the VAT hike – may provoke a stronger and more protracted response of inflation expectations. Especially in the situation when inflation expectation are still unanchored.

The third factor we focused on is monetary conditions.

Monetary conditions in the Russian economy tightened somewhat under the influence of external factors, in the first place. The government bond yield curve shifted considerably upwards. Some banks started raising their interest rates on loans and deposits. Financial markets have already prepared for a key rate hike. The key rate hike will, on the one hand, enable deposit rates to hold above the inflation rate, thus supporting the propensity to save and balanced growth in consumption. On the other hand, the prompt response of monetary policy will allow us mitigate inflation risks and, all else being equal, resume the rate cut cycle earlier than expected.

An important factor we took into account is the state of the economy. The developments were in line with our expectations. The 2018 GDP growth forecast has remained unchanged at 1.5-2%. We updated our medium-term forecast, factoring in the announced structural and fiscal measures, as well as the changing external conditions.

The 2019 GDP growth rate is forecast to range within 1.2-1.7%. According to our estimates, the VAT rise will only have a modest constraining effect on economic growth rates, given that extra tax revenues are projected to be used within the same year to underpin economic growth.

The GDP growth forecast is raised to 1.8-2.3% for 2020. Economic growth might accelerate over the next few years provided that structural changes are successfully implemented. This will be conducive to the increase of current GDP growth rates, as well as its potential ones. Therefore, economic growth pick-up will come without greater inflationary pressure.

We have slightly adjusted upwards the oil price path, given the current supply and demand balance. The baseline scenario implies a gradual descent of the oil price from its current high levels to $55 per barrel in 2020-2021. This will be assisted by an expansion in shale oil production and a steady relaxation of oil production curbs under the agreement between oil exporting countries. The first steps in this direction were made in June this year. However, all this does not rule out a chance that oil prices may linger close to current levels for quite a long time under the impact of various geopolitical factors, among other things. At the same time, oil price movements will not produce considerable pressure on economic growth and its structure, given the fiscal rule effect. It works to smooth out the drag from the energy commodities market on the domestic economic environment and public finance.

The forecast current account balance is revised upwards from $85 billion to $98 billion for 2018 (approximated 6% of GDP). It will be around $75 billion in 2019 and $45-50 billion, or about 3% of GDP, in 2020-2021. We revised upwards our estimates for the private sector’s negative financial account balance in 2018 from $30 to $55 billion. As we go forward, our forecasts suggest the financial account balance of the private sector will drop markedly to $27 billion in 2019 and to roughly $18 billion in 2020-2021. Current account revenues considerably exceed the demand for funds to repay external debts. Therefore, the existing balance of payments does not pose any risks to exchange rate dynamics and macroeconomic stability over the forecast horizon.

And to sum up, I would like to say that our decisions today serve to respond to the increase in inflation risks. At the same time, the Bank of Russia believes that the prompt response of monetary policy will keep the growth of inflation risks in check in the future and lay the groundwork for monetary policy easing between late 2019 and the first half of 2020.

14 September 2018

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