Statement by Bank of Russia Governor Elvira S. Nabiullina at the State Duma of the Russian Federation on 18 November 2014 on the Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017

Distinguished colleagues!

Let me introduce you to the ‘Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017’ worked out in compliance with Article 45 of the Federal Law ‘On the Central Bank of the Russian Federation’. The final version of the Guidelines presented to you today differs from the initial one. It has been completed with consideration of remarks received from the State Duma committees and the expert community.

All of you have the document at your disposal and were able to read and discuss it in the committees of the State Duma.

I would like not to retell the document but rather highlight the guidelines of our policy in the context of issues you as well as the society are concerned about.

Thank you for the questions sent in advance to the Bank of Russia by the parliamentary groups, I will touch upon some of them in my speech and answer the rest in written form.

The Guidelines were adjusted with consideration of changes of external and, unfortunately, not always positive factors. Falling oil prices and restricted access to the market of external borrowings for a number of largest Russian companies exert pressure on the ruble. We have developed five scenarios which differ in terms of oil price dynamics and the duration of sanctions. Even in the worst case – average annual oil price of 80 US dollars per barrel and persistence of sanctions until late 2017 – our economy will retain stability and we will be able to decrease inflation to 4% target in three-year run.

We are completing the transition to inflation targeting. It was scheduled, but it is especially important not to shift the time frame of this process now: amid restricted access to external financing and increased need of the economy for import substitution we see the preservation of households’ income and savings as the key objective. Without low inflation the economy will not see long-term money, investors’ planning horizon shrinks and uncertainty about the future increases.

Transition to inflation targeting requires floating ruble exchange rate. Floating ruble helps to smooth the effects of external shocks on the domestic market, it is the exchange rate that is most affected. Countries practicing inflation targeting are characterised by lower dependence of inflation from the exchange rate. It is especially important now when prices for energy resources are unstable and the ruble exchange rate is directly dependent on oil prices.

The two issues I will mostly speak about are the foreign exchange policy and the availability of loans for the economy. These issues are pivotal in the monetary policy.

The impact of external factors on the exchange rate required from the Central Bank quick response and the ability to promptly adjust its instruments still preserving strategic political guidelines.

Throughout the year we have been preparing transition to the floating exchange rate regime, increasing flexibility of our policy and reducing the volumes of regular interventions stipulated by the rules.

The Central Bank has intended to complete the transition to floating exchange rate by the end of this year, and the decisions we took on 10 November were not unexpected or premature.

Why have we decided to move towards the floating exchange rate in such uneasy external conditions? Why could not we fix the exchange rate or give up its management earlier?

Transition to the floating exchange rate requires adjustment period, the currency cannot be set free abruptly.

The latest decisions were preceded by gradual restriction in foreign exchange interventions, including recent restriction to 350 million US dollars a day.

The market was given a chance to adjust to lower Central Bank influence on exchange rate formation.

Floating ruble exchange rate is particularly essential now: in deteriorating external conditions it is the exchange rate that faces main negative consequences protecting the domestic financial market and the economy.

This decision is an integral part of the transition to inflation targeting policy: we expect this regime to decrease the impact of exchange rate fluctuations on inflation. Amid restricted access to foreign funding and uncertainty in the energy market, low inflation will provide for the safety of savings and create prerequisites for developing domestic investments.

Why could not we fix the exchange rate? It should be realised that holding the exchange rate artificially will not solve the objective challenges, primarily, oil price fall. Holding the exchange rate would require substantial reserves and considerable restriction of ruble liquidity that would result in significantly higher interest rates in the economy. This in its turn would result in contraction of lending to the real sector, primarily in import substituting industries.

Besides, money market would experience liquidity problems and the stability of financial and banking system in general would decrease, and we still would have to give up exchange rate management but more abruptly. Thus, floating exchange rate currently has no effective alternative.

Up to November we stuck to the rule of foreign exchange interventions that combined significant exchange rate flexibility with the possibility to smooth fluctuations. As a result, though the ruble exchange rate sank, we have managed to ensure financial stability.

It is a very important achievement, as previously such dramatic fall in oil prices followed by the decrease in the ruble exchange rate was accompanied with financial market disturbances: defaults, margin calls, and liquidity crises. Currently, money market and stock market are, on the contrary, stable, and the banking sector continues functioning normally. It shows that our financial system is more stable now than it used to be in 1998 and 2008 and is better prepared for significant fluctuations in oil prices and other negative external developments.

The floating exchange rate also contributes to a decrease in speculative pressure on the ruble which recently played a decisive role in the ruble depreciation. The Central Bank though moving to the floating exchange rate preserves the right to interfere at any moment in order to sustain general financial stability. We have informed market participants that we are ready to implement unexpected interventions in case of negative developments. Under these conditions speculative strategies become more risky. And the market has responded adequately. And we believe that the ruble is likely to appreciate in case there are no other negative external developments.

I would like to emphasise that consistent policy of the Central Bank is highly important. The ongoing changes will impact the development of the Russian economy in the short term. It means that responding to the current challenges we should bear in mind the most important objectives – preservation of households’ income and savings, supporting import substitution, shaping conditions for the development of the financial sector and long-term money in the economy which should be delivered primarily by the domestic investors. However, these goals are impossible to achieve without inflation decrease. It is highly important to realise that.

Let me touch upon the interest rate policy of the Central Bank.

When discussing the Guidelines, all parliamentary groups – the Liberal Democratic Party of Russia, the Communist Party of the Russian Federation, the Just Russia, and the United Russia – asked questions about the reasons to raise interest rates and I would like to give a detailed explanation of our policy in this area.

Indeed, this year we have raised the interest rate in total by 4 pp. These decisions were based on the detailed analysis of consequences and primarily the impact on the economic growth. Curbing inflation without discouraging the economic growth is a hard challenge.

This year has really seen a slowdown in growth. But what the economic situation would look like if the interest rates remained at the level of 5.5% as they used to be early this year?

We have made such estimates and they are thought provoking. The impact on the economic growth would have been minimal in case of low unemployment and high capacity utilisation. But this would have required further ruble depreciation by approximately 10% and current inflation growth to 11-12%. These would have a negative impact on the economic growth already the next year. Pursuing this policy would trigger inflation that would finally result it lending shrinkage and decline in confidence in financial system in general.

September-October saw deterioration of external conditions: oil prices fell considerably with tighter sanctions against a number of large Russian companies. Under these conditions, ruble depreciation alongside with foreign trade restrictions imposed in August, resulted in accelerated consumer price growth. Inflation rose to 8.6% in early November with even higher values in case of foodstuffs.

Persistently high consumer price growth during a considerable period leads to higher inflation expectations laying basis for further inflation increase. Under these conditions the Bank of Russia decided to raise the key rate to 9.5%.

The key rate increase results, inter alia, in higher interest rates on household deposits. Increased inflation and inflation expectations in Russia usually trigger decrease in ruble deposit growth rate and funds transfer in foreign currency. Banks’ customers are ready to retain ruble deposits only if the interest rates level the effects of inflation. Thus, higher interest rates stabilise deposit inflow and, consequently, the funding sources for the economy.

Of course, we are concerned about the availability of loans for the economy. Amid higher inflation and growing lending rates, small and medium-sized businesses, agricultural companies (already burdened with accumulated debt), and start-ups in manufacturing sector become the most vulnerable. Banks are not eager to lend to them even in usual conditions (due to inadequate collateral, pledges and high risks).

Special, primarily governmental, programmes and instruments are required. And the Central Bank does not deny it. Furthermore, we offer new instruments as we realise that the financial system does not provide long-term funding of investments yet.

In April, we decided to provide liquidity for investment projects for three-year term at favourable interest rates, and made the required agreements with banks. Besides, during the latest key rate increase, we raised benefits for such projects from 1 pp to 1.5 pp. Thus, we are ready and waiting for the projects selected by the Government. We believe that at the first stage it would be highly important to select projects aimed at import substitution as a priority.

We have an ongoing programme of refinancing of loans to support small and medium-sized business, the Central Bank allocates funds for it at the interest rate of 5.5%. But, unfortunately, it is not very efficient. Almost half of the resources are not used. We intend to update the programme in cooperation with small and medium-sized businesses in order to make it more useful.

We also have a programme to support non-oil and gas exports through EXIAR agency.

We have recently established a special working group that will develop measures to surmount stagnation in lending to agricultural sector in cooperation with State Duma deputies, the Government and banks.

The introduction of a new auction-based instrument, 18-month loans, is also aimed at supporting long-term lending. The introduction of this instrument at the minimum interest rate (the key rate plus 0.25 bp) is essentially similar to the decrease of long-term interest rates.

Let me remind you, that this year we have actively developed lending secured with credit claims and its volume has increased by 1.5 trillion rubles.

I would like to emphasise that the measures taken by the Bank of Russia alone cannot solve the issue of import substitution. Businesses must be ready to invest their own funds alongside with the borrowed ones. But we have seen the opposite lately: businesses withdraw their own funds, inter alia, through dividend payments, including early ones.

Besides, measures to enhance labour force mobility are required. The share of unemployed able-bodied population is currently small, and further economic growth is possible only in case of higher productivity of labour and transfer of labour force from less efficient industries to more efficient ones.

I would like to draw your attention to the level of regional debt load. Loans to regions are quite tangible. Of course, banks are more eager to issue loans to the regions rather than to finance the economy and carry out the related risk-management processes.

Imposing debt bondage on the regional governments will do no good either to themselves, or to economy financing.

And finally, about our long-term objective – inflation decrease to 4% target. I will omit previously mentioned its social and economic importance. I am going to speak about the advantages the new inflation targeting policy gives. This regime provides for a decrease in the dependence of the economy from the external shocks like oil prices. Inflation targeting and floating ruble exchange rate will make economic growth, inflation and budget more stable against oil price fluctuations.

Effective inflation decrease and keeping it persistently low raises the households’ confidence in the national currency and the state economic policy in general. Out constitutional objective is to ensure ruble stability. And we should stop measuring this stability in terms of foreign currencies only: how many dollars a ruble can buy. Households are more concerned about the quantity of goods it can buy. Ruble stability means primarily its purchasing power and, as a consequence, low inflation.

The Communist Party asked if we should target at 6-6.5% as 4% target can be hard to achieve.

We believe that setting a permanent target means predictability of the Central Bank policy, shows not only its tactics but also its strategic goals. Meanwhile, we are not intending to achieve it at all costs in the near future. We have shifted the time frame for achieving this target.

We expect the inflation to fall to 6.2-6.4% in 2015.

Inflation decrease will also be driven by the fading impact of the imposed foreign trade restrictions, stabilisation of exchange rate dynamics, and, hopefully, successful implementation of import substitution programmes, especially in food production which have prevailing impact on the inflation structure.

The Central Bank takes into account the contribution of nonmonetary factors to inflation: we watch very closely the taxation regime and tariff setting by natural monopolies. We are convinced that in cooperation with the Government we will manage to achieve 4% inflation target in three-year run.

And to conclude, let me say a few words about our vision of further developments.

I have already mentioned that we worked out five scenarios. The large quantity is connected with the abundance of uncertainties. The analysis of all these scenarios, our calculations show that inflation targeting regime and floating ruble exchange rate will sustain economic, financial and price stability even amid significant oil price decrease, and establish conditions for long-term sustainable economic growth.


Thank you very much for your attention.

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