Statement by Elvira Nabiullina, Bank of Russia Governor, in the follow-up to Board of Directors meeting on 16 September 2016

 

 

Today, the Bank of Russia has decided to reduce its key rate to 10.00% per annum.

We can see that annual inflation has slowed down considerably, from 7.2% in July to 6.6% in mid-September, in line with our baseline forecast. In August, inflation expectations returned to a downward path, while households’ behaviour model remains saving-oriented. Economic indicators show mixed performance, so we still cannot register a transition to sustainable growth.

For inflation to continue dragging down to hit the 4% target in late 2017, monetary conditions should remain moderately tight. For that end we need to keep the key rate at 10.00%, at least until the beginning of the next year. We will be able to look into its reduction in 2017 Q1-Q2 at the earliest, as suggested by our estimates based on the updated macroeconomic forecast to be published today in the Monetary Policy Report.

I would like to dwell on the factors behind our key rate decision and our outlook for its future path.

First. Inflation drops in line with our forecast. However, this partially results from temporary factors we should consider in our estimates of its future dynamics.

We have revised our inflation forecast for the year-end to 5.5-6%. Inflation has already slowed down to 6.6%, with weekly data for the beginning of September taken into account. Let me remind you that a year ago we expected annual consumer price growth to stand at about 7% in September 2016. Core and underlying inflation indicators have been down. This year’s good crop contributes to inflation slowdown, but in our forecasts we consider this factor to be temporary.

We also keep in mind that inflation goes down in the recent months against a global market environment more favourable and the ruble stronger than our forecasts assumed. Having said that, inflation has failed to fall below the expected level. It may point to the fading deterrent effect of long-term factors, primarily consumer demand. This is also evidenced by individual inflation indicators. In particular, non-food price growth still shows a slow decline, and seasonally adjusted monthly inflation is still elevated.

We focus on this matter. To be really sustainable, inflation reduction should be backed primarily by long-term factors. These factors include households’ and businesses’ behaviour, their expectations of future prices and interest rates, wage dynamics, costs and income. We shape necessary incentives and conditions to reduce inflation and inflation expectations by sticking to a moderately tight monetary policy.

Though demand-side impact on inflation is fading, it remains low and continues to check inflationary pressure, despite some improvement in income dynamics, because households’ propensity to save remains relatively high. Positive real interest rates on deposits play an important role here.

As regards incomes, they still show very diverse dynamics. Wage growth varies across industries and social groups. Real disposable income shrank following the decline in non-wage profits. We can see a modest recovery in demand for individual durable goods. Nevertheless, retail turnover remains weak and we do not expect this trend to reverse in the near future.

The second factor we took into account is inflation expectations and expectations regarding the key rate, which largely shape the tightness of monetary conditions.

Importantly, households’ inflation expectations resumed their downward trend, being at its lowest since autumn 2014. However, speculations about the steadiness of this downward trend are premature. We should wait to see it consolidate. Though declining, inflation expectations of business and financial communities still exceed our inflation forecast and the 4% target. Having said that, we can see market participants predict a lavish key rate cut. As a result, long-term interest rates fall behind short-term ones. This environment affects monetary conditions and strengthens our concern, because the potential for nominal rate reduction is limited. We expect that the message about keeping the key rate at 10.00%, at least until the beginning of the next year, will drag down inflation expectations. It will close the gap between short- and long-term rates despite the persistent inversion of the yield curve.

As I have recently mentioned, real rates should be positive and underpin the propensity to save, while demand for loans should remain moderate. In this case, neither consumption recovery, nor lending growth will outrun the economy’s capacities. At the same time, the ruble will still appeal to domestic and foreign investors. As a result, neither demand, nor exchange rate will put pressure on inflation.

In addition, debt burden in the economy will ease progressively, though remaining elevated in some groups of borrowers. Imbalance prevention is a precondition for the maintenance of financial stability. It is fundamental for a healthy and high-quality economic recovery.

Third. We also recognise that a gradual movement towards a structural liquidity surplus would automatically result in somewhat reduced nominal interest rates. This is however a predictable and manageable process of a limited scale. We regularly run repo auctions and, as regularly, deposit auctions, depending on the current liquidity situation and the state of budget flows. When this happens, money market rates remain close to the key rate. Our capabilities to impact on economic interest rates will be unchanged once we have finally moved to a structural liquidity surplus. This transition is forecast to occur as early as 2017. The Bank of Russia will apply all the appropriate tools to ensure operational control is in place over the level and the structure of market interest rates. In particular, there are plans, beyond auctions, to issue Bank of Russia coupon bonds. Starting from today, their specifications are available on our website.

Let me emphasise that the application of the so-called liquidity absorption tools is not going to undermine banks’ lending capabilities: as we, through our instruments, seek to tie up a liquidity surplus in the system – which, no matter what, resides in accounts with the central bank. The rate we apply here is close to the key rate – which is intended to escape a scenario of downward pressure on rates in the money market and, consequently, on all other rates in the economy, with the risks of their heightened volatility.

On the subject of the current economic state, the recovery has so far been unsteady and heterogeneous across sectors and regions, this being another factor to recognise.

Some positive movements continue to be seen in the output structure as related to import substitution and the rise in some non-commodity exports, to name a few. In this way, signs emerge that the output of high-tech products have started to rise. These include household appliances, machines and medical equipment. At the same time, there has been some deceleration in growth paces of the former drivers, namely, chemicals and the food industry. The individual ‘growth points’ are insufficient to ensure that overall production performs strongly – considering their small contribution to the total output. It takes time for the positive trends to develop and become entrenched.

We see the labour market undergoing adjustment to the new environment. Unemployment is still low, suggesting no growth in part-time or concealed unemployment. These facts are primarily driven by demographic restrictions rather than economic improvements. Enterprises seek to retain skilled labour as the supply of manpower is low. Although there has been some growth in nominal salaries, our estimates suggest that there are no inflationary pressures coming from the labour market.

Labour market conditions point inter alia to the fact that the advance of the Russian economy is limited by internal structural factors. These stem from the infrastructural and institutional profile of our economy, as much as from the current demographical situation. Their potential impact on future economic growth may be stronger than our expectations. Even now they find their way into the unstable recovery of economic activity, as well as the signs that disinflationary pressure from demand is declining.

As before, we expect quarterly GDP growth rates to enter positive territory as early as 2016. Yet, in line with the updated baseline forecast, GDP growth rates in 2017 will be low at less than 1%. As the structural constraints continue to play a role, the rates of economic advance are set to settle down at 1.5-2% between 2018 and 2019. Our baseline scenario provides for no positive impact from external conditions, as our calculations assume the average annual oil price of $40 a barrel over a three-year horizon, as well as low rates of global economic growth.

As we make a decision on the rate, we always take into account the balance of payments. We expect the current account balance to decrease in the long term, in sync with reduced capital outflows in the environment of a floating exchange rate.

Between 2016 and 2018, net capital outflows (that is, the difference between capital outflows and its inflows into the country) will remain at a historically low level (no more than $25 billion). Corporate external debt payments will progressively decrease, considering the available refinancing facilities. Growth in the demand of the real sector for foreign assets will be held back by slowly recovering incomes, as well as by the invariably high real interest rates in the Russian economy, which make ruble savings attractive. We look to banks fully repaying their debt on FX refinancing operations before the end of 2017, thereby enabling the foreign currency reserves to grow. Importantly, even the risky oil price scenario ($25 a barrel) identifies no material threat to the balance of payments.

No strengthening in inflation risks has been observed. However, they are in place.

These risks relate to inflation dropping more slowly than we expect, under the influence of one or a set of the following factors. First, the high inertia of inflation expectations, specific to Russia, can be responsible for their inappropriately low movement as is necessary to drag inflation down to 4%. Second, a sharp changeover in the population’s behaviour model from saving- to consumer- oriented can amplify inflationary pressure. Third, the certainty as regards fiscal consolidation, including the indexation of wages and social payments, is yet to come – and this can affect consumer behaviour. And, finally, the external environment risks cannot be ruled out, considering that oil price fluctuations impact on, through ruble exchange rate movements, domestic prices and inflation expectations.

It should be stressed once again that inflation risks are not understood to be the risks of inflation strengthening. Inflation will continue its downward movement – we are fully confident here, as well as market participants are. These risks consist in the rates of inflation ‘getting stuck’ at around 5%-6%, failing to reach the target level needed to enable a more favourable environment for economic growth.

We are sure that we will be able to reduce inflation to the target level even in case of the inflation risks materialising. As I say so, I want to emphasise that our target is to reach not a one-off mark of but a steady level of inflation. Yes, the task on hand is to deliver on its reduction to 4% in 2017. Yet, what we mean is not to have this level registered at a certain point in time, but to ensure that inflation resides sustainably around this mark of four per cent. And it is not a magic figure of some kind, yet a new level of price stability, inflation expectations and credibility in macroeconomic policy.

We believe that there is every chance to deliver on this target. Many countries have already made this journey. But it is only through a consistent and sustainable policy that we could deliver on such a really sustainable outcome.

Living in a high price and income growth environment may seem to be more customary and even attractive. Yet, this is a deceptively easy and, obviously, a non-performing direction. What needs to happen is a change in our conventional ideas on what should be price growth in the economy. No less important is it for businesses to continue on the path of performance improvement, for the structure of the economy to upgrade and for competition to advance. These all would create a strong foundation to enable reduction in inflation and to spur economic growth of a higher grade.

Q&A for Media

Bloomberg:

I would like to ask you two questions, if I could. One, concerning the statement, you say that the Bank of Russia deems it necessary to keep the rate at 10% through the end of the year. Does that mean that a potential rate cut decision, to be made at one of the two forthcoming Board meetings, is totally out of the question? And, if you predict full-year inflation to total 5.5-6%, while the rate is 10%, then it turns out that the real interest rate is in positive territory, the difference there being four percentage points – which is above your previous estimates. So could you please comment on the level of real interest rates and say whether a further downgrade in the interest rate is possible in the remainder of the year?

And, if I could, my second question. This is concerning VTB. The bank has unveiled its overnight bond programme. In this connection, has there been any consultation on the subject with you, or is it the bank’ exclusive initiative? Thank you.

ELVIRA NABIULLINA:

Now, regarding a rate decrease in the course of this year – according to our baseline scenario, this seems an extremely remote possibility. I do admit there is a slim chance this might happen – but only if we see substantial improvement against our baseline scenario. In other words, this is outside our baseline scenario, for one.

Second, on the subject of real interest rates – it is a very good question. Indeed, it is imperative that we achieve a steady rate of inflation of 4%; as we do this, first order of business, we need to anchor inflation expectations at 4%, that is, to ensure they are settled within the close range of 4%, this being our target inflation rate. This is no easy task. To deliver on this task, we will need to keep real interest rates positive for a prolonged period even after inflation has settled at 4%. We estimate this level of positive rates to be within the 2.5-3% range.

Yet, given that the current inflation expectations are a lot higher as we have yet to cover the distance towards the 4% target, this gap [between nominal rates and inflation] could be wider. And, this gap, or, rather, this level of positive interest rate, is set to decline gradually to 3%, as we discussed. This is indeed a matter of principle as we are committed to reducing inflation and inflation expectations, to be enabled by the high level of real interest rates, positive interest rates, with their progressive reduction to the equilibrium of 2.5-3%.

As far as VTB is concerned, true – this was the bank’s corporate decision. They have the right to issue bonds and decided to do so. In this connection, this issuance will have no potential impact on the overall level of liquidity. This may be the case of liquidity redistribution among money market participants, that is, banks. If the outcome is more evenly distributed liquidity, from the standpoint of our transmission mechanism, this is nothing but a positive development.

RIA Novosti:

My question is as follows. Early September, Russia and Saudi Arabia agreed to cooperate in the oil market to make it more stable. Was this arrangement a consideration for the Bank of Russia as it was making its interest rate decision? According to Bank of Russia forecasts, what implications is this arrangement likely to have for the Russian financial market and the economy overall?

And, my second question, if I could. S&P, a ratings agency, is due to unveil its Russia ranking decision today. What are your expectations as regards this S&P decision? Thank you.

ELVIRA NABIULLINA:

To answer your first question – undoubtedly, our interest rate decisions are based on our assessments of the impact from oil prices. These, in their turn, are driven by multiple factors to be factored in, including the current markets, agreements in development, benchmark figures of both major producers and consumers, recent updates on the number of rigs in operation and trends dominating in the shale oil business etc., as well as estimates for how long the current oil glut may hold. Unquestionably, all these are considered.

To ensure that our policy and interest rates are predictable, our position is that they should be based on a more or less conservative, realistic but conservative, forecast for oil prices. We see today that oil prices are slightly above the mark we forecast for a three year horizon.

We think this approach is key to a truly consistent monetary policy. Let me say once again, our forecasts assume $40 a barrel.

S&P – well, let’s wait and see. I hope this will be a favourable decision.

INTERFAX:

Two questions, please. First, liquidity surplus is connected with the speed of the Reserve Fund spending. Under the Ministry of Finance estimates, the fund will be exhausted 2017. Does the Bank of Russia have any tentative estimates as to how long the system’s liquidity surplus would last – 2, 3 or 4 years?

And, number two. The Central Bank has unveiled today the specifications for its forthcoming bond issue. Back in June, you mentioned that some trial issues are not impossible before the end of the year. Are these plans still there? And, if so, when are these trial issues are scheduled to come onto the market?

ELVIRA NABIULLINA:

As for the liquidity surplus and its impact on the monetary policy, we are working closely with the Ministry of Finance to predict how a structural liquidity surplus will take shape. And, let me say once again, according to our estimates, a sustainable liquidity surplus is due in 2017 – as long as currently, a surplus gives way to a deficit, and vice versa. This will be the case if the spending out of the reserve funds amounts to some 2.7 trillion rubles. If this amount is less, a surplus will occur later, and if slightly more – earlier.

Next, the way a structural liquidity surplus would take shape, whether it is to be rising or remain unchanged, will ride on how the Reserve Fund resources are spent. But even afterwards, once we are done with spending of the reserve funds and a certain liquidity surplus has emerged – it may hold for a long time without growing further – that is, a certain structural surplus of liquidity can remain for a long time. For a deficit to start to decline, some savings need to be accumulated in the budget. And the timeframe for the amount of such savings to be generated also depends on the fiscal policy.

And, we look to such certainty to emerge in medium-term fiscal policy so it is with more surety that we could speak on the speed with which the structural surplus will be taking shape and how long it will hold. This is on question one.

Question two, regarding the bonds. Indeed, we have determined key bond specifications today. We stand ready to operate as we launch the bonds, where trial issues are possible. We can do away without those, however, as the effect of deposit auctions has been appropriate.

Market players, that is, lenders, will be able to buy the bonds and conduct repo operations with each other. But Bank of Russia repos will involve the need to make individual changes to legislation – and these changes, too, are in the works.

Russia 24 Channel:

Mrs Nabiullina, following on from the liquidity surplus in the banking sector, what could be the incentives for banks themselves to invest into the real sector, lending at comfortable rates? Thank you.

ELVIRA NABIULLINA:

Admittedly, this is really a challenging issue, I mean, the efforts to encourage banks to extend loans related to new investment, technical upgrades, project funding – considering that banks are currently inclined towards a more conservative strategy driven by their deposit-related payments on hand.

Last month, there was a certain rise in consumer lending, as opposed to lending to corporations. As we discuss the issue, we should see how prepared the real sector is to implement such projects – projects with return on investment. The return on investment and soundness of such projects are crucial, because extending of credit always comes with the understanding that loans is one side and deposits is the other, that is, returns should be adequate to enable servicing of liabilities including under deposits.

Such projects should pay back and be reliable, and the more such projects the economy offers the more banks will be willing and capable to lend to such sectors.

This type of lending is underway, although with mixed dynamics, across various sectors as we see both growth points and niches into which banks make foray. Consumer lending includes mortgage programmes. We also see some dynamism in lending to the sectors which have been growing: the food industry, chemicals and mining. That is, there are such projects across various sectors, and it is the emerging structural adjustment that brings about more projects of this type.

REUTERS:

In today’s press release, the Bank of Russia was very specific as regards its future key rate actions.

What was the reasoning behind this explicit communication of your future strategy? This may be the first time the Russian central bank has acted this way.

And, question two. Has your decision been influenced by a probable Fed rate hike and, in this regard, are you expecting it to come in September or December?

ELVIRA NABIULLINA:

On the subject of future paths. Indeed, it is the first time that we have communicated a more, let me say, clear picture of our intentions for the next few months. And the reasons behind these are as follows. First, we see market expectations, as well as the general sentiment, for the interest rate to move downwards. However, market expectations as regards the downward movement path are somewhat misaligned to ours. At the same time, market expectations suggest it is not everyone’s expectations that inflation will be 4% by the end of next year. This would mean that we reduce the rates but we might fail to deliver on our 4% inflation target. Here, we would like to make clear to everyone that our target is inflation of 4% by the end of 2017. This is why the path of downward movement in the rate is tailored to exactly this target, 4% inflation.

We also note some inflation risks I have cited earlier. These risks call for a more cautious approach to the downward movement path [of the key rate]. That is why we have added predictability to our future course of action for market participants to see. Number one.

And, number two, as far as the Fed is concerned, we look into various Fed policy scenarios. The current estimate assumes at least one rate hike through the end of the year. There could be two hikes, we do not rule out this. And, in either scenario, the ensuing reaction of financial markets is factored in, be it our forecasts or our rate decision.

TASS:

Please comment on the plans to reschedule some privatisation projects. Should these be postponed, there will be a shortfall in budget revenues. Was this a consideration, too, in the Central Bank’s decisions?

And, a second question, if I could. You mention that the Central Bank is somewhat little concerned over a too optimistic mood of analysts expecting a rapid interest rate cut. Is this a palpable risk? If so, can it accumulate? What would be your strategy to address it?

ELVIRA NABIULLINA:

On privatization deals – if postponed, they will not weigh in directly on our actions. It is overall budget deficit that is of more importance to us. We proceed from the goal to keep it to a planned threshold. It is up to the Government to determine the sources to fund the deficit – essentially, this is the triple choice of privatisation, borrowings and the Reserve Fund resources.

Once again, we are working very closely to see which sources are used so that we can build the appropriate liquidity provision and absorption policy that would enable us to reach our [operating] target, namely, the maintenance of money market rates at a level close to our key rate. Therefore, I see no big problems here from the viewpoint of our monetary policy and efficiency of the transmission mechanism.

As for risks of more optimistic expectation with regard to rate cuts, let me emphasise again what, in our view, constitutes a certain problem. There are expectations of a more rapid downward evolution of the rate, but at the expense of failure to deliver on our inflation target. Our message: we intend to deliver on the target and will review the rate in the way to enable us to achieve the target.

IZVESTIA:

Two questions from me, if I could. First, many analysts have noted the risks that prevent the Central Bank from lowering the rate today. Could you also specify, please, if the Board has been unanimous in its decision, or were there some separate opinions? This is not asking you to reveal individuals – yet which risks did they cite, if any, and how did they make their case?

And, secondly, in your statement you refer to the risk of failure to deliver on the 4% target next year, which is coming from households’ weakened propensity to save. Is this concern hypothetical in nature or do you see some trends emerging? What could drive this weakening – a rising disposable income or some other factors? Thank you very much.

ELVIRA NABIULLINA:

Thank you. As is the case with any Board decision, there are some preparatory expert meetings. The Board has voted unanimously today. This vote was preceded by lengthy professional discussion involving experts – because there is a case for both rate reduction and maintenance determined by the risks we considered. We wanted to make all this reasoning clear in both our press release and statement. We see the risks but we believe that the conduct of a moderately tight monetary policy, aligned with caution with rate cuts will enable us to deliver on the inflation target.

As for savings and a saving-oriented behaviour model – true, the households’ behaviour remains saving-oriented. And this has a meaningful disinflationary impact. We realise however that this model is not permanent and a number of factors could cause it to change – so this is what we should consider. These factors include, beyond rising incomes (which could certainly be behind this potential turnaround), the level of deposit interest rates.

We are mindful of this force. Generally, households will choose between saving up or spending right away based on anticipated economic performance including the future wage trends and employment data. People having more confidence tend to spend more, while once the signs of a crisis emerge, people will aim to save up. We see the population’s behaviour being influenced by a string of factors. There is no mathematically calculating a figure, so we need to monitor the developments closely. Consumption is certain to rise gradually – which is a done thing in an economic rebound. It is imperative that we prevent any financial bubbles in both consumer lending and consumption. This is not the case now, so we have to watch things carefully and react if need be.

Rossiiskaya Gazeta:

What do you make of the steps made to promote ‘deforexation’ of bank assets and liabilities? Would it make sense to revisit the issue – to reinforce or to loosen the policies? And a related question, please. Do you leave open the possibility that zero-yield forex deposits may emerge? Thank you.

ELVIRA NABIULLINA:

Regarding ‘deforexation’. Given that these policies are quite new, any conclusions would probably be premature. Some policies have proved effective – which is seen, for example, in consumer lending, especially mortgage lending which has almost been reduced to zero, as a result of macroprudential measures.

Now, on the subject of required reserve ratios, foreign exchange- and ruble-differentiated – although their viability remains to be seen, overall we see no growth in dollarisation. And this suggests that the needed constraint works.

We may take further measures as required. Once again, we are monitoring these trends on a permanent basis so we can make policy corrections if need be.

As for foreign exchange deposits, the interest rates are trending lower somewhat. Yet, I think these, at least in the foreseeable future, are unlikely to get a zero rate.

RIA Novosti:

My question is as follows. Many analysts expect the ruble to depreciate sharply in the end of autumn. Some say the authorities are keeping the ruble stable in the run-up to the Duma elections. What does the BoR expect? Can the ruble collapse at the year-end? Thank you.

ELVIRA NABIULLINA:

Such predictions come up occasionally with relation to different months. These expectations are just unreasonable. We do not see even an elevating volatility risk at the moment. Certainly, the exchange rate depends on oil prices and their performance. Oil prices have been wobbling lately, but have remained more or less stable, as you can see.

By the way, fluctuations of the ruble are currently less pronounced than those of oil prices, and we expect this trend to hold.

As for the stable currency exchange rate, it is market-based reasons that underlie it. We do not interfere in the operations of foreign exchange markets. The floating ruble [exchange rate] is determined by the market climate. And it is relatively stable.

Interfax:

As I could see in the press release, you have revised the 2017 GDP forecast downwards to less than 1%, whereas your previous forecast ranged between 1.1-1.4%. Could you, please, explain the reason behind it? Has the Bank of Russia revised macroeconomic parameters for the risk scenario where the oil price stands at $25 per barrel?

ELVIRA NABIULLINA:

We have really updated our forecast as we usually do at our quarterly flagship meetings. We actually revise our forecasts and publish them in the Monetary Policy Report. The publication is to be released today for you to see.

I just want to say that this revisin is not a radical one; it is really a mere revision. As regards the baseline scenario – I believe it to be the principal one, - we have left our June GDP growth estimates unchanged, i.e. -(0.3-0.7)%. We have really slightly revised our 2017 estimates following the reassessment of the so-called economic growth factors or economic performance, as they are of more structural nature, i.e. they impose more structural restrictions. The structural factor means much more than the cyclical one, we have revised this relation. But this is true only for 2017 dynamics; for 2018 and 2019 we still forecast a 1.5-2% growth.

The risk scenario has also been revised slightly.

Reuters:

What real impact do you expect today’s rate cut to have on the economy and growth recovery? Because, on the one hand, you have cut the key rate, but on the other, you are going to impact liquidity. That does not match lending growth revival.

ELVIRA NABIULLINA:

Could you, please, clarify, what does not match?

Reuters:

You have said that the Bank of Russia will hold bond auctions, which does not favour lending growth.

ELVIRA NABIULLINA:

First of all, we expect the rate cut to bring about the inflation growth rate we have promised, i.e. this decision is in line with our inflation reduction target. We believe that the range of today’s rate cut allows us to deliver on the inflation target. On the other hand, lending is also likely to go up; we watch the way accessibility of loans is growing.

Liquidity absorption works differently. These two functions – rate cut and liquidity absorption – match, rather than contradict each other.

When absorbing liquidity that is provided – sometimes unevenly – through the fiscal channel, we seek to bring money market rates closer to the key rate. Thereby we are steering rates in the economy. Should we fail to absorb the liquidity, they would become unmanageable and go down more abruptly, undermining the inflation target. We steer rates through our key rate. These operations are aimed at keeping money market rates close to the key rate.

Bloomberg:

Could you, please, give more details on the liquidity surplus? When do you expect it to hit the level where the Bank of Russia will have to issue bonds? In other words, when will be the first issue and what should be a liquidity surplus?

ELVIRA NABIULLINA:

It mostly depends on sustainability rather than the volume of surplus liquidity, because deposit auctions are of a short-term nature, while bonds are supposed to have a three, six and 12-month maturity, i.e. it is a longer term liquidity absorption and we will embark on this instrument when the liquidity surplus is stable.

As I have mentioned, it depends on budget spending. We are drifting between surplus and deficit, or, rather, caught in a deficit with occasional flashlights. If budget spending meets the target (m2.7 trillion this year), we will face structural surplus early next year. No one can tell you the exact date now. We are likely to face it at the very beginning of the next year.

ELVIRA NABIULLINA:

Let me add that deposit auctions allow us to absorb any amount of liquidity. We issue BoR bonds for convenience, but deposit auctions are a very effective tool.

Wall Street Journal:

I have two questions. One, clarification on capital outflow. You have said it will not exceed the annual amount of $25 billion in the upcoming years. Did I get it right that you do not expect sanctions to be lifted and banks and companies to be able to borrow abroad?

The second questions concerns interest rates. As long as you have detailed your rate cut plans, does it mean that should inflation stand at 4% by the next year-end, your key rate will be higher by 2.5-3%, i.e. 6.5-7%? Thank you.

ELVIRA NABIULLINA:

As for capital outflow, we forecast it not to exceed $25 billion. This year, we even predict it to be lower, as the current dynamics show.

Yes, in our forecast we act on the premise that sanctions will persist on a three-year horizon. Nevertheless, we believe that despite the sanctions remaining in place, there are no balance-of-payments-related challenges and there will be no pressure either on the ruble exchange rate or on inflation, because the balance of payments has already adjusted to both sanctions and low oil prices. That was the first.

Second, as for the rates, equilibrium positive rates may stand at 2.5-3% after the 4% inflation target is met. But before the 4% level is achieved and perhaps some time after that, they may be a bit higher. It depends on how quickly inflation expectations go down and to what extent they are anchored.

Even with 4% inflation, if inflation expectations are higher, we will probably have to hold positive real rates higher as well.

We will, therefore, consider all these facts. It cannot be calculated automatically as 4 plus 2.5 or 3. It depends on economic developments, inflation, inflation expectations, and inflation risks. It is an assumed prospective average level after the 4% target is reached.

RIA Novosti:

The Bank of Russia always insists that Russia needs a medium-term budget system balancing programme worked out; otherwise both the Russian economy and monetary policy may face risks.

What budget deficit does the BoR see as acceptable and can it be exceeded in 2016? Thank you.

ELVIRA NABIULLINA:

We are perfectly aware that both budget and fiscal policy need time to adjust to the changing environment of falling oil prices. It clearly takes time and, therefore, it is impossible, and would be unwise to, quickly cut down budget deficit. But I believe that understanding of a medium-term strategy, which will show a path for budget deficit reduction, and budget financing are more important than a budget deficit.

We find the Ministry of Finance-suggested path of 3%, 2% and 1% of GDP to be quite acceptable; it allows adjusting the budget to the new environment while preserving macroeconomic stability.

Reuters:

Could you please detail? You say that deposit auctions are an effective tool and you have initiated preparations for BoR bond issue. Has the Bank of Russia given up required reserve increase, hasn’t it?

ELVIRA NABIULLINA:

We do not give up anything, we have the whole set of instruments at hand. But we made this decision [on the required reserve increase] and in September the ratio became effective. The results remain to be seen and assessed, but it does not mean that we will or will not decide on the next step. We need to see where the first step takes us.

Izvestia:

My question is as follows: if the Ministry of Finance and the Government are consistent in implementing the discussed rules in the fourth quarter and do not allow fund recipients to use, as usual, in December what they have failed to use before then, how will it impact on the next year inflation? Can it fall below 4% in this case?

ELVIRA NABIULLINA:

No, it will not have any impact on inflation, it may affect our moves to adsorb or not to absorb excessive liquidity. In any case we will absorb enough of it for [money market] rates to stand at the level we need to deliver on the inflation target. Therefore, it will not impact on inflation; it will impact on the scale of BoR operations, the volume of excessive liquidity absorption or non-absorption.

RIA Novosti:

Mr Oreshkin, Deputy Finance Minister, said recently that the Chinese economy was in for a slump, the global economy was challenged, and he did not rule out that the stress scenario with oil prices at $30 per barrel would materialise in the upcoming years. Can the BoR agree with that? What do you expect?

ELVIRA NABIULLINA:

Certainly, external risk factors exist. In the baseline scenario, we proceed from a slower growth of the Chinese economy, but this slowdown will be predictable, in line with the Chinese authorities’ agenda, and the Chinese economy will shift to another development model.

The same is true about other external challenges, we do assess them all. Certainly, a negative scenario may materialise, and our risk scenario is even more negative with oil prices at $25 per barrel, but we consider this risk scenario very unlikely.

Interfax:

Yes, I have a question. In your recent statement in Sochi you touched upon unsecured lending, which may bring pro-inflation risks. Could you, please detail what growth rates you expect this year and what lending growth will be convenient for you and will not impact on inflation?

ELVIRA NABIULLINA:

Too fast consumer lending growth may really trigger two types of risks. First, financial stability risks, when a bubble is accumulated and households’ debt load grows actively. Macroprudential measures allowed us to avoid this scenario, which had started to take shape in 2012–2013. We will not allow this scenario to materialise. We have the so-called macroprudential tool kit with differentiated [bank asset] risk weight ratios, etc.

As regards the possible impact of consumer lending on inflation, banks’ loan portfolio growth structure really impacts on the level of inflation such lending growth may provoke, its contribution to demand and supply increase.

From this point of view, accelerated growth of consumer lending may bear the risks we should consider. For the moment, there are no direct risks revealed, but this sector requires close attention for such risks not to emerge.

We believe that consumer lending growth should be close to that of households’ income, we have already mentioned that, to avoid bubbles and have an adequate growth not exceeding households’ income growth.

Reuters:

I have a question about the next year key rate path, and whether it can be changed by a 0.25 pp increment.

ELVIRA NABIULLINA:

I get it, thank you. We have been using a 0.5 pp increment lately because the rate was two-digit. I believe that we may return to a 0.25 pp increment. After another [key rate] cut it will stop being two-digit and we will be able to consider the 0.25 pp increment, we do not rule it out. It will be an adequate change as compared with the rate level.

As for the key rate reduction, it will depend on economic and inflation developments next year. We will analyse them closely.

Let me repeat that our key objective is to reduce inflation in line with our agenda and we will adjust the key rate path to that target. Thank you.

Thank you for your time.

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