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

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.

Media Q&A Session


Mrs Nabiullina, this time around the Bank of Russia's press release on the key rate did not mention the deadline for the transition to a neutral monetary policy; the Bank of Russia also toughened its rhetoric and announced that it was considering the possibility of raising the key rate further. I would like to ask about the neutral policy: is it the case that the Bank of Russia will currently refrain from giving benchmark indicators? Is this not being considered?

My second question concerns households’ foreign currency deposits: the latest US sanctions may impose a ban on banks conducting foreign currency transactions, and people have already started worrying about their foreign currency savings. Can the Bank of Russia reassure Russian citizens: can it state there will be no forced conversion of foreign currency deposits into rubles should such sanctions come into force?


In terms of the direction of our policy and the neutral interest rate, we have not yet changed our estimation of the neutral rate in the mid and long-term – I would like to remind you that it stands at 6–7% adjusted for inflation, with target inflation at 4%.

However, in the short term, there was an increase in the country risk premium and our inflation forecast for the coming year increased. Therefore, we estimate that we are already within the neutral rate range. Therefore, we will continue to evaluate the situation and the direction of our policy. That can be used as an assessment of neutrality: the fact that we are already at the neutral policy level.

We will make a further decision based on the development of the situation, proceeding from whether the potential inflation risks we can see in fact materialise – above all, external risks – and, depending on this, make further decisions on the rate.

As for foreign currency deposits and the threats of sanctions against a number of our banks, we are, of course, heeding this possibility and working with the banks; we have worked out a system of measures with each of the largest banks that allows them to resolve all their problems and fulfil their obligations to their clients with our assistance. We do not envisage any threats to foreign currency deposits, and we have not considered any measures on forced conversion; we have not even entertained the idea. We believe these measures would only undermine confidence in the banking system.

QUESTION (Bloomberg):

If I may, I have a few questions about the statement itself. Could you please clarify: ultimately, inflation peaked in the first half of the year – what level was it at? It was not specified.

My second question: could you give an assessment of the market's current foreign exchange liquidity? You have commented on extending the pause in foreign exchange buying but could the Bank of Russia reintroduce a foreign exchange repo this year? Does it envisage such risks?

One more question: How much was today's decision to raise the rate dictated by the need to calm the markets that had questioned the Bank of Russia's autonomy after the comments on the rate made in Government and in the Kremlin?


It is true, we expect inflation to peak in the first half of next year owing to a one-time increase in VAT, and, of course, the effects of the VAT increase will primarily be felt in the first half of the year. Our estimates suggest it will stand at 5.5, maybe reach 6%.

But then, as we see it in the second half of the year, quarterly inflation values in annual terms will return to 4%. That said, they will overall be tilted to the upside across the whole year because of the VAT increase, so this one-time increase in the first half of the year is possible.

As for foreign exchange liquidity, we do not envisage any problems with foreign exchange liquidity; it is at satisfactory levels on the market. Of course, the foreign exchange repo option is always at our disposal but we currently have no need to use this instrument.

Regarding our decision-making. The Bank of Russia makes decisions based on the analysis of a given situation, using forecasts, and in line with our aim of delivering on inflation targets. Basically, this is the cornerstone of our autonomy.

QUESTION (Interfax):

Hello, Mrs Nabiullina. Perhaps you have already assessed the outflow of non-residents' funds from the federal government bond market that has been taking place since the rise in volatility of early August. How much have they decreased and how much of an impact has the effect of this phenomenon had on the weakening of the ruble exchange rate over this period?

I would also like to ask about the foreign exchange market: do you agree with Maxim Oreshkin’s assessment that exporters are currently holding on to foreign exchange proceeds in anticipation of a further weakening of the ruble and are not selling currency, which could have a positive effect on the exchange rate. Don't you think that they should actually gradually do so somehow?


It is true, some non-residents left the foreign government bond market: At their peak in spring, they made up 34.5%. According to the latest data at the beginning of September, they stood at 26.6%. Since April, when the volatility and geopolitical risks hit, non-residents have withdrawn approximately 480 billion rubles from this market.

Certainly, this was reflected in the yield levels and in a certain weakening of the exchange rate but it is very difficult to isolate the effect it had because there were other developments taking place in world markets at the same time. On the whole, there was a capital outflow from emerging markets. We have yet to complete an assessment of which factor proved impactful there.

As for exporters, we are constantly monitoring the situation and see no intention to hold back foreign exchange proceeds. For example, based on the data on 30 largest exporters we monitor, in August the sale of foreign exchange proceeds increased by more than 50% – roughly in line with that of oil prices. There is no holding back of proceeds – we have not seen this effect.

QUESTION (Reuters):

I would like to know if the Board of Directors considered increasing the rate by 50 basis points? Did the Central Bank of Turkey’s decision yesterday to sharply raise the rates influence in a way your decision? It is possible the Central Bank of Turkey has partially alleviated external risks.

As far as I understand, you are saying that the Bank of Russia may soon reinstate a cycle of rate cuts. In other words, if I understand correctly, you have not embarked on a rate increase cycle. What is your view on this?


Different options were on the table: the general need to raise rates, whether this need exists, and the size of the rate increase. Each option had its pros and cons and, taking into account the inflation risks we had forecasted and which had materialised, we considered it the right decision at the time to raise the rate by 0.25 percentage points.

As for Turkey and its central bank's decision to raise the key rate there, we expect that this will actually lead to a pickup in investors' attitudes towards emerging markets, which includes Russia. We can see this in the reaction of the markets. Nevertheless, when we make a key rate decision, we certainly take external factors into account and other external factors currently hold greater sway in Russia right now. We are also guided by our economic and inflation forecasts.

As for the question of whether this is the beginning of a rate increase, or a rate increase cycle. We cannot exclude the possibility of a rate hike but it will only occur if the aforementioned risks materialise. This will not necessarily be the case. We cannot categorically state that this is the beginning (of a cycle – editor's note) of a rate hike. Moreover, we have said that the fact we can make this decision (about a rate increase) relatively quickly, we believe this will reduce inflation risks in the future and, vice versa, all other things being equal, allow us to reinstate a rate easing cycle earlier. Therefore, in the long term, we envisage a rate reduction cycle.

QUESTION (The Wall Street Journal):

The Government views investment in infrastructure as one of the main driving forces behind economic growth in the coming years. How important a role does monetary policy play in the success of this strategy and do you consider the credit needs of contractors and investors when seeking your solutions?


Indeed, increased economic growth rates are driven by increased investment in infrastructure. That much is clear. So that investments in infrastructure are not just made by the government, not just from government resources (this type of investment growth is assumed and resources are set aside for it), but that there is also the opportunity for private investors to invest.

In our opinion, our monetary policy, which is aimed at maintaining steadily low inflation, increases the predictability and reliability of such long projects. What is more, for private investors willing to invest in infrastructure, it lays the groundwork for the emergence of long-term money in Russia, and investments in infrastructure are long-term money. This is the main direction, the priority of our work. No doubt, we understand that the credit needs of those who invest in infrastructure should be taken into account.

QUESTION (News.ru):

Mrs Nabiullina, you mentioned that a system of measures was developed with the banks that allows them to find solutions to problems with the help of the Bank of Russia and fulfil their obligations to depositors, clients, etc. Could you clarify what these measures are and whether there will be any regulatory easing for banks in connection with the introduction of new sanctions as was the case in 2014?


The first thing I would like to say is that should the situation develop unfavourably, we will, of course, support our banks in every possible way. We have the instruments and means to do so. Depending on the structure of their make-up and operations, we have worked together with the banks on creating the necessary measures. They are finalised, and we understand what the consequences will be – there may be consequences from the restrictions introduced, because unfortunately there are banks that have been subject to these restrictions, so we understand how these sanctions can have an impact. There may be an easing. If this is the case, we do not rule out the introduction of regulatory easing as was the case in 2014. Therefore, we are preparing for a possible unfavourable development in the banking sector.


You previously asserted that the Bank of Russia does not envisage a problem if the US government imposes sanctions on Russian sovereign debt. Is the Bank of Russia still of the opinion that in the event such sanctions are imposed and there is a large-scale sale of securities, the local Russian market will be able to buy up all these volumes?


We see no major problems linked to the introduction of this ban or their impact on the financial system as a whole or on the economy. We have very low government debt. Even if you look at the total amount of federal government bonds that non-residents currently hold, they stand at about 26 billion US dollars. When compared with our resources, our reserves, this is a small figure.

Obviously, if such measures are introduced, there will be increased volatility before rates stabilise at a particular level. If this happens, we can also, if necessary, introduce easing for our financial institutions so they can adapt with greater ease to changes in our federal government bond prices, as we did in 2014, or make it possible to transfer securities from the trading portfolio to the liquidation portfolio.

QUESTION (Russia-1 Television Channel):

If I may, Mrs Nabiullina, my question is neither about rates nor the foreign exchange market, but about Ukraine's sovereign debt owed to Russia, which stands at $3 billion, and regarding which, the Court of Appeal in London decided today to hold another hearing at Ukraine’s request. Is there any chance that Ukraine will give us this money back? Basically, can we expect that money at all, or can it be consigned to the realm of fantasy?


This matter is outside the purview of the Bank of Russia.

QUESTION (Bloomberg):

Can we return to the issue of the banks? Last week at a financial forum, the head of VTB and the Minister of Finance raised the issue of pressure on Russian banks. It was suggested that the application of Basel III capital adequacy requirements be postponed. Therefore, my question is as follows: can the Bank of Russia postpone the application of these requirements, or will it ease current requirements? Do changes to banking regulations, for example changes to one of the capital adequacy indicators, have to be triggered by the introduction of sanctions or could they be brought about by the ruble exchange rate? Fitch, a rating agency, said that with the ruble at 75 to the dollar, VTB is in a critical condition and it will be vital to take some kind of measures. What measures could they be?

My second question: the interview with the CEO of VTB, Kostin, published today, contains proposals for de-dollarisation. Have you seen these suggestions and what do you think of them? My question is in light of the possibility that sanctions could extend to the largest state banks, Sberbank and VTB. Given that that these banks attract both household and corporate foreign currency deposits... to what extent does this threaten financial stability given the possible risks?


That is a lot of questions. I will try and answer them all.

Starting with capital adequacy requirements. It is our intention and priority to increase stability in the financial system. We are introducing regulations and capital buffers not just because of Basel III requirements, but because they are necessary to better protect banking clients, depositors, and bank creditors. Our banks must be well-capitalised. Therefore, we do not want to ease regulatory requirements because of sanctions or anything else. Sanctions are not a reason for our banks to be less financially stable.

Naturally, should there be certain drastic external developments with an impact on banks' balance sheets, we can offer easing as a temporary solution, but it will indeed be temporary as was the case in 2014. This policy has proved effective. We give banks time to adapt to the latest external conditions that may affect their balance sheets.

Therefore, exchange rate movement is no trigger here. Rather, we basically monitor the influence of certain factors. They could be the prices of certain assets if there is a drastic change. We constantly monitor the situation, watching the financial situation of these banks, and based on this, if necessary, these kinds of decisions can be made. However, in our opinion, there is no such need right now and we do not envisage that it emerge in the near future.

As for the suggestion to de-dollarise. I saw these suggestions to de-dollarise in the press but did not see any detailed proposals. We will review them all. I definitely support this in terms of payments, in terms of increasing payments in the national currency. However, this should proceed in line with economic feasibility and the interests of our exporters. Nevertheless, these processes are already happening, which certainly looks promising.

Definitely, we support the policy of de-dollarisation in principle. More so, we are implementing this policy. In recent years, the level of dollarisation of banks' balance sheets both in terms of deposits and loans has been on the decrease; so we will continue to pursue this policy.

As for creating, say, a national Eurobonds depository, we already have a national depository, and we have the National Settlement Depository (NSD). International bonds, such as the Ministry of Finance's Eurobonds, may already be in the NSD. Therefore, we are not talking about creating some kind of infrastructure; we just need to clarify what is available so that accounting is conducted in Russian depositories. Certainly, we will look at specific problems.

As for household foreign currency deposits, we do not envisage any risks here. Firstly, the volume of foreign currency deposits on banks' balance sheets has decreased. They total about 87 billion US dollars. That's all the household foreign currency deposits. What's more, our resources and the resources of the banking system are definitely sufficient to ensure that whatever may happen, all obligations on household foreign currency deposits will be carried out in the relevant currency. Therefore, we do not envisage any risks in this sphere.

QUESTION (Interfax):

Could you explain again the mechanism for purchasing currency within the fiscal rule. You suspend purchases in the market but carry on with execution of the Ministry of Finance's requests, as the Ministry of Finance stated. Which funds do you take this currency from and does this cause any changes to the international reserves? How, then, is your aim of increasing this indicator going?


This happens in the following way: every day, as per Ministry of Finance requests, we reduce the ruble funds in its ruble accounts at the Bank of Russia and increase its foreign currency funds.

Certainly, suspending the purchase of foreign currency does not lead to a decrease in foreign exchange reserves. It simply means the rate of their increase is slowed. However, our level of foreign exchange reserves is more than sufficient. What is more, when we assess that financial market volatility has decreased, it does not matter what rate the ruble is at when this happens (the exchange rate is entirely irrelevant in this regard), we will reintroduce regular purchases and see how we can compensate for deferred purchases without increasing financial market volatility. As I already said, we do not need to do this over very short periods.

This is because currently our purchases on the open foreign exchange market and on the domestic foreign exchange market may increase existing volatility. We have suspended these purchases to curb this volatility.

QUESTION (Russia 24 Television Channel):

Mrs Nabiullina, how do you see the ruble fairing against the dollar and euro by the end of the year?


We are targeting inflation and do not generate exchange rate forecasts in connection with inflation targeting policy.


I would like to ask for a bit more detail about the previous topic. You said that you have developed a system of measures with the banks. I wanted to clarify whether this is only with the state banks mention in the US sanctions documents or with all the major banks?


With the major banks but I am not going to name which ones.

QUESTION (Fontanka.ru):

It has been made clear the Bank of Russia sees further potential to lower mortgage rates.

How do you view the claims that there is a mortgage bubble forming in the Russian market? Could this actually happen in the event rates are being lowered? And what will be the lowest rate?


We do not envisage a bubble in the mortgage market despite the fact that mortgage lending is growing rather rapidly – at about 24–25%, which is a fast growth rate.

Since this lending is growing rather quickly, we certainly are keeping a close eye on the quality of mortgages issued. I have repeatedly said and want to reiterate that right now: the quality of the mortgage lending service is very high. Nevertheless, we are introducing preventive measures to maintain the quality of mortgage lending. They include increased risk assessment and risk ratios for mortgages with low down payments (less than 20%). This way, banks are incentivised to issue high-quality mortgages.

As we see it, lower interest rates on mortgages are brought about by a monetary policy aimed at inflation targeting – not just one that aims to keep inflation low right now, but also that market players trust that inflation will remain under control and stay low for the entire mortgage period.

Our policy of inflation targeting and supporting consistently low inflation rates in fact stimulates this type of lending. Therefore, we can see the potential for further growth here. As inflation returns to our target, we estimate that in the medium term mortgage rates may be around 7–8%.

QUESTION (Interfax):

Can we assume that since you have upped your forecast for inflation for next year to a level that exceeds your target, it means that next year there will, in all likelihood, be no rate reduction?


We will monitor the development of the situation. We currently have to deal with several uncertainties. You yourself understand this very well. We are now certain about pro-inflation risks in domestic policy. Incidentally, since the last meeting of the Board of Directors, we have calculated with greater accuracy the impact of the VAT rate increase. However, one of the factors – external – remains uncertain. Plus, uncertainly lies not only with this factor but also with the reaction of financial markets and of inflation expectations to this factor, which includes the VAT increase. We will take all of this into account. Right now, we cannot say what decisions we will make.

I have already said, as we published in our press release, that we are not ruling out a further rate increase if inflation risks materialise, and that this changed rate will be subsequently maintained. If the risks do not materialise, we will be able to quickly take measures to reduce the rate.

QUESTION (The Wall Street Journal):

You mention that you are working on measures together with major banks. What can you say to reassure those who make deposits in medium and small banks about foreign currency deposits? How can fears about sanctions on foreign currency transactions in Russia influence the consolidation of the banking system in Russia?


I cannot say that the risks of sanctions have an impact on the pace of banking system consolidation. As for major banks, I cannot see any risks linked to foreign currency deposits, as I have already said. This is because of the size of deposits themselves, their proportion to the resources of both the Bank of Russia and the banking system. Therefore, there are no risks.


I would like to ask once again, please, about sovereign debt. Last week or the week before last, the Ministry of Finance said that in the event of extreme stress in the financial market, the Ministry of Finance and the Bank of Russia will consider the possibility of entering the secondary foreign government bond and security market. Can you please clarify the Bank of Russia's position on what constitutes extreme stress that would lead you to enter the secondary market?


Indeed, there is theoretically such a possibility and we have the infrastructure in place to do so as well as the legal conditions for us to enter the market – to buy up foreign government bonds. However, to be honest, I do not see the feasibility or even the likelihood of such events occurring in the near future that would force us to enter this market.

As I have already said, if there is a need, we can introduce regulatory easing for our financial institutions. This may be one of the damping measures available if there is increased volatility in this market.

Thank you.