Statement by Bank of Russia Governor Elvira Nabiullina in follow-up of Board of Directors meeting on 11 September 2015

Good afternoon, dear colleagues.

Now, today the Bank of Russia has decided to retain the key rate at 11 % p.a.

In my statement today, I will highlight the reasons behind this decision.

Recently, inflation risks have increased somewhat, while the risks of a further economic cooling remain. Our decision will help achieve the 4% inflation target in 2017.

This decision was based on the comprehensive analysis and forecast of economic trends. The detailed analysis will be published today in the quarterly Monetary Policy Report. In my statement I would like to overview some principal issues.

External conditions

We have observed that the key global economic trends remain; this includes, first, growth recovery in the US, the UK and several other advanced economies. However, there have been several interconnected negative trends in the global economy and the global financial markets.

First, the global growth overall demonstrates a very slow recovery. The most significant trend of this year is a slowdown in many key emerging markets (mainly China, Brazil, etc.), which is not set off by growth in the advanced economies (USA, UK).

Furthermore, the expectations that the slide in prices for oil and other commodities would trigger global growth by boosting competitiveness of commodity exporting countries have proved untrue. Slower growth and investment in exporting countries has more considerable impact on the global economy.

Second, the volatility in the global financial and commodity markets has grown. I believe there are three reasons for that:

Reason 1: Uncertainty over the Federal Reserve rate increase and timeline, which is set to trigger additional capital outflows from emerging markets as the global liquidity remains redundant, as well as extend credit spreads and add to exchange rate turbulence;

Reason 2: Investors’ uncertainty over Chinese economic prospects;

Reason 3: Changes in the market – primarily the oil market – structure due to changed competitive environment and pricing, as a result.

The latest developments also show that the global oil market has become more sensitive to changes not only in objective factors (demand and supply), but also subjective expectations and sentiments, which may change rapidly. Therefore, volatility in commodity prices will be elevated in the coming years.

Most forecasts by international organisations, analysts and market participants suggest that the recent deterioration in market condition is temporary and the oil prices are likely to recover in the medium term; however, this recovery is expected to be short of previous expectations. Furthermore, there is no common understanding regarding the new sustainable price

The market’s search for the equilibrium is likely to take some time and oil prices are likely to keep fluctuating.

Third, the Chinese economic development is another independent important factor impacting not only market volatility, but also the development prospects of the global economy, global trade and global commodity prices, which certainly impacts on the Russian economy. China is our major trading partner.

The ongoing correction in the Chinese stock market, along with changes in the exchange rate mechanism have triggered a surge in volatility in the global markets. Investors reappraise economic growth developments as China is undergoing its transformation from an investment-driven model to the one based on domestic consumption.

Therefore, the external conditions overall remain unfavourable.

In taking today’s decision we have considered the higher external risks, guided by the foreign economic development forecast, which assumes low global growth and volatile markets. Oil prices in the years to come will linger at about $50 per barrel.


The Bank of Russia’s monetary policy has been a major driver for falling inflation rates; however, the worsening in external conditions has hampered the trend. The nominal effective ruble rate fell by 10 % in August.

This resulted in a steeper rise in the current inflation than we have predicted earlier. Inflation expectations of households and businesses exacerbated against this backdrop.

Nevertheless, going forward we expect inflation to decrease, since our monetary policy remains moderately tough, economic activity and demand remain weak, while the effect of the exchange rate pass-through to inflation will be lower than that at the time of turbulence, i.e., late 2014 – early 2015.

In previous years we estimated the pass-through effect at 0.1-0.15. The ruble depreciation we observed between late last year and early this year was accompanied by a more significant and quicker-than-usual, influence of the exchange rate on prices. The pass-through effect rose to 0.4 in that period. Yet currently, when the exchange rate developments ceased to be monodirectional and reflect high oil price volatility, we estimate the pass-through effect to go down. Its level will be slightly higher than previous years, but below those for early this year. At present, we estimate this pass-through effect at about 0.2. Also, we believe that the major exchange rate pass-through to prices will take about three months.

The ultimate influence of the depreciated ruble on inflation will largely depend on the response from business players and which course their inflation expectations will take.

We estimate the August depreciation of the ruble to contribute about 2 percentage points to the annual inflation in December.

Based on these assumptions, we revised our inflation forecast upwards to 12-13% for late 2015. Nevertheless, the annual inflation in September 2016 is projected to be about 7%.

I would like to emphasise once again that inflation reduction will be facilitated by the current monetary policy, together with exhausted pass-through effect, base effect and low domestic demand.

The Bank of Russia will continue to monitor inflation risks regularly and will pursue its monetary policy with a view to reaching the 4% inflation target in 2017.

The economic situation

The domestic economy is adapting to the new external conditions: to a noticeable fall in revenue from external economic activities. This process will take some time and will be characterised by a combination of a structural and cyclical recession.

In the second quarter, the economic downturn was more profound than in the first quarter. It was accompanied with a decline in consumer and investment activities, coupled by a positive contribution of the external demand (net exports). The relative sectoral indicators currently point to structural changes, including import substitution, occurring primarily in non-capital-intensive sectors. The key reason, as we see it, is general high uncertainty which remains. Apparently, even strong profits for the first six months were scarcely used for investment growth purposes in the sectors including those with import substitution potential.

Moving forward, the currently available data is of a mixed nature. Some indicators, i.e. unemployment, industrial output, freight transportation, etc. are showing the signs of a start of stabilisation in output decline rates. The other indicators, namely, business sentiment, investment and real wages still evidence an on-going recession.

In the near term, the labour market situation will put restrictive pressure on consumer demand dynamics. It will continue to adjust to new conditions primarily via weak increase in nominal wages and not unemployment growth. The state of the labour market, mainly, labour compensation developments, reduced numbers of employed persons and somewhat increased part-time employment, will help check inflationary pressure. Growth in household expenditures will be limited by sluggish consumer lending and households’ growing propensity to save.

In recognition of the deteriorated external factors and the latest statistics, we have revised our forecast for this year. According to our new estimates, GDP will fall by 3.9-4.4%. Under the baseline scenario, we assume a reversal of the downward trend in the second half of the next year.

This will be supported by a gradual loosening of financial conditions on the back of reduction in the real sector’s debt burden, including its external debt, moderate production cost dynamics with regard to wages and administered rates. As a result, quarterly GDP growth could turn positive in the second half of 2016. In 2017, the annual economic growth rates will be slightly positive, and in 2018 they could reach 2.0-3.0%.

Our forecast is built on the assumption that in the medium run structural restrictions, including demographic and institutional ones, will continue to influence the dynamics of Russian economy’s long-term potential.

Monetary conditions

Despite the somewhat softened monetary policy of the last few months (lending and deposit rates were lowered following the reduction in the Bank of Russia’s key rate), the monetary indicators have continued to put pressure on inflation. The current monetary conditions, driven by the Bank of Russia’s influence, remain relatively tight on the back of, among other factors, non-price related lending terms, which have been tightened in the circumstances of uncertainty and deteriorated credit portfolio quality.

Monetary aggregate growth rates remain low, driving a further inflation decline. According to preliminary estimates, the monetary aggregate growth rate (M2) totals 7.8%, which is above this indicator for early this year (2.2%) and yet, substantially lower than the 2011-2013 average.

Lending to the nonfinancial sector, following its downfall in the start of the year, has begun to recover. Its recovery rate remains rather muted at 7.65%, for 1 September, and at-1.4% if adjusted for exchange, which is lower than in the previous years.

Lending recovery is hampered by both the high key rate and the high debt burden of borrowers, while investment demand remains low.

Overall, the year results point to a moderate growth in monetary indicators. Moving forward, monetary growth rates are projected to accelerate to 8-11% in 2017 and 13-16% in 2018, which is consistent with the money demand evolution amid the 4% target level for inflation as well as the economic potential.

The balance of payments

The balance of payments has already greatly adapted to the new external environment. The drop in the value of imports by almost 40% resulted in the 18.4% growth of the current account balance against last year despite the fall in the value of exports.

As for the capital account, the nature of capital outflow is changing. It is based on foreign debt payments which are less in numbers against the last year’s statistics and are expected to continue their downward movement in the future. The importance of other factors including ‘the internal outflow’ through transfer of savings into foreign currency is on the decline. In other words, capital outflow is more pronounced in terms of decreased foreign liabilities rather than in terms of growing foreign assets, something we witnessed in the past years. As a result, oil prices have become more instrumental in affecting the dynamics of the currency exchange rate, while the impact of factors related to the capital account declined.

Starting today, we will publish comments with preliminary assessments of monthly indicators of the balance of payments. Our assessment for the period between January and August shows that the current account totalled 51.1 billion US dollars, while the capital outflow dropped to 52.2 billion US dollars against 77.1 billion US dollars last year.

We envisage that by the end of the year the current account balance will be 73 billion and capital outflow to total 85 billion US dollars. In this case, the future payments for the debts of banks and companies could be financed through accrued assets and inflow on the current account, including the foreign currency refinancing of the Bank of Russia. We are ready, when necessary, to increase the fund limits at foreign repo auctions and foreign currency loans to provide the market with additional liquidity in the event of a growing demand.

The coming years are expected to witness a lower capital outflow to 50-60 billion US dollars annually as debt payments recede, with a highly positive current account balance.


With all these factors taken into account (a more thorough analysis is presented in the Monetary Policy Report), we see that the strengthening of inflation risks, coupled with the risks of substantial economic slowdown, are still in place. In recognition of these factors, today the Bank of Russia took the decision to keep key interest rate at the level of 11% per annum.


Now let me proceed to say a few words on the Guidelines for the Single State Monetary Policy for 2016-2018.

As I have mentioned, forecast estimates behind our today’s decision on the key rate are in line with the baseline forecast presented in the Guidelines for the Single State Monetary Policy for 2016-2018. The baseline forecast provides for the average oil price of 50 US dollars per barrel in the next three years.

The draft Guidelines consider another two scenarios, the optimistic and risk ones. The optimistic scenario suggests that oil prices will grow to 60 US dollars per barrel next year, 70 US dollars per barrel in 2017, and 75 US dollars per barrel in 2018. The risk scenario provides for the oil price reduction to or below 40 US dollars per barrel in the next three years.

In all cases we assume that financial sanctions and ongoing restrictions for certain imports will persist on the whole forecast horizon. We also expect the ongoing conservative fiscal and tariff policy to continue.

More moderate indexation of tariffs of natural monopolies and wages/salaries in the public sector will bolster inflation reduction.

Meanwhile, possible revision of indexation parameters of administered prices and wages/salaries is among considerable pro-inflation risks of the forecast.

In the baseline scenario, we expect the Russian economic growth to remain negative, about -(0.5-1.0)%, in 2016, to reach low positive values in 2017, and to stand at 2.0-3.0% in 2018. Inflation will reduce to 5.5-6.5% in 2016, will reach 4% in 2017 and will persist close to the target level in 2018.

The optimistic scenario suggests that the economy will start growing in 2016. By 2018, the GDP growth is expected to increase to 2.5-3.5%. According to the risk scenario, unfavourable external conditions will trigger more considerable and protracted decline in investment and consumer activity. The drop in GDP may become deeper in 2016 and persist in 2017. The risk scenario suggests that the upward trend can be expected only in 2018.

In any scenarios we intend to reduce inflation to the target level in 2017.

The baseline scenario does not provide for considerable changes in foreign currency reserves in the forecast period. The optimistic scenario allow of a slight increase in foreign currency reserves during the forecast period (about 15 billion US dollars a year) due to the gradual abandonment of FX refinancing, among other things. If foreign conditions are favourable, in the medium term we will continue replenishing foreign currency reserves. They serve as a buffer for repelling threats to financial stability in future.

The risk scenario suggests that extended FX refinancing operations may be required to prevent financial stability risks. In this case we forecast reserve reduction in 2016 without possibilities to replenish them in 2017-2018.

In all scenarios, the monetary policy will be based on the assessment of balance of risks for the economy and inflation and inflation reduction to the 4% target in the medium term.

Our decisions will be based on the continuous monitoring of trends, adjustment of medium-term forecasts and risk trade-off assessment.

It is essential to realise that even in the best case (optimistic scenario) the Russian economy will have to function in more challenging external conditions than before and will face difficult challenges. Therefore, structural changes are required. They would drive the economic development: reallocation of resources to more competitive economic segments, import substitution, non-commodity exports, new technologies, and better human capital.

Consistent monetary policy aimed at reducing inflation and inflation expectations and ensuring stability of the financial system will boost the development of internal sources of long-term financial resources and predictable environment for implementation of these changes.

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