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Statement by Bank of Russia Governor Elvira Nabiullina in follow-up of Board of Directors meeting on 10 June 2016

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up of Board of Directors meeting on 10 June 2016

 

The Bank of Russia decided to reduce the key rate from 11.00 to 10.50 % per annum. We repeatedly stated that we saw a potential for a rate decrease as soon as the conditions are in place for inflation to slow down to the target. We are now even more confident that inflation is on the path to drop and reach the 4% target by the end of 2017. In the aftermath of heightened uncertainty and risks early this year, we see the economic situation stabilising. The economy, as well as inflation, is performing better than expected, and overall inflation risks have abated. However, we still see the risks related to domestic factors, that is, the the inflation expectations inertness and uncertainty in fiscal policy.

We are confident that we will be able to drag down inflation to the target even if the inflation risks materialise. But to deliver on this, we need to proceed with a further cautious and balanced approach, upholding moderately tight monetary policy. We will consider the possibility of a further rate cut only if the inflation decline aligns with the forecast trajectory and inflation expectations decrease.

Let me give in more detail concerning the factors the Bank of Russia Board of Directors was taking into account in making this decision.

There is growing confidence in the sustainability of the trend of inflation moving down to the target.

First. Inflation is showing a better performance. In defiance of our expectations for annual inflation to grow in the second quarter on the back of the past year’s low base, it is not rising. Inflation has steadied at 7.3%. That is, it beats our forecasts. The current inflation indicators are still lower than annual ones, standing at about 5% (the average monthly annualised inflation for the last three months, seasonally adjusted). This reflects the recent weakening in inflation processes.

Second. The temporary tailwinds are still making an impact, dragging down inflation, despite the fact that this impact is dwindling.

The strengthening of the ruble in the second quarter helped check inflation. The response of domestic prices to ruble exchange rate fluctuations remained on a downward path. In the short term, we do not expect any expressed impact of the exchange rate on inflation.

The low growth rates of producers’ costs are also positively weighing with the performance of consumer prices. This is partially connected with the drop in global energy prices seen in the beginning of this year and the muted performance of wages.

Importantly also, the regulated prices and rates are set to be indexed in July in line with the previously mentioned indicators. The value of indexation is less than half of that in the past year.

The drop in fruit and vegetable prices seen between March and April occurred on the back of the favourable environment made up of strong estimates for crops, high stocks and low global prices. In the spring, fruit and vegetables were becoming cheaper earlier than usual, thereby decreasing the consumer price index. However, in our inflation forecast we recognise that fruit and vegetables may show weaker than usual pace of cheapening in the summer season, following the recent material drop in their prices in the spring.

In this way, we can say today that the first half of the year saw no risks materialising, both from the external environment, and internal factors, which became the grounding for inflation expectations to be reviewed. They are still steadier declining, making a positive impact in the performance of inflation.

Third. The guarantee that inflation decline is set to continue as the effect of short-term factors run their course comes from the factors of a more long-term nature which include low demand and moderately tight monetary conditions. These two factors are behind some improvement in the economic situation we have been seeing, mainly in the production industry, and they generate no additional pressure on inflation.

Consumers remain cautious as they are continuing to save more. The level of actual interest rates is helping preserve the attractiveness of savings for households. It thereby contains the growth of consumer spending even as nominal wages are edging up.

The Bank of Russia has lowered its forecast for inflation for the end of the current year to 5-6%. A short-lived increase in annual growth rates of consumer prices in June is not ruled out, to be driven by the low base effect. Inflation may go beyond the forecast for one year ahead as published by the Bank of Russia in its June 2015 press release (‘less than 7%’). Moving forward, growth rates of consumer prices will continue to shrink, mainly on the back of demand limitations. Annual inflation is expected to total less than 5% in May 2017, reaching the target rate of 4% by the end of 2017.

As we were making the key rate decision, we also recognised the existence of a factor which leads to softening of monetary conditions even if the key rate is left unchanged. I refer to the onset of surplus liquidity in the banking sector due to federal funds spending. In these conditions of surplus liquidity, banks will feel no need to attract financial resources from the central bank and will, conversely, place funds with it. Banks could reduce their deposit rates and soften price and then non-price lending terms with the key rate unchanged Structural liquidity deficit is currently observed, but its level has been considerably down against the last year peaks. We take into account that onset of surplus liquidity is expected to take place in the next year – (somewhat later than we expected), because federal fund expenditures are to be cut down as the external economic environment becomes more favourable.

We have the complete toolset at our disposal so that we could, in the surplus liquidity conditions, first, secure operational control over rates in the money market and, secondly, keep monetary conditions moderately tight. The Russian banking sector has experienced the liquidity surplus before, so the situation is not new to us. In order to steer the money market rates we will hold regular liquidity absorption operations instead of liquidity provision operations we are holding now. Moving forward, the plans include the issuance of Bank of Russia bonds. Their placement, in a test mode, is coming shortly.

The available instruments enable the Bank of Russia to limit the surplus. We are already selling government securities from our portfolio. We also look into the increase in required reserve ratios for ruble deposits and the option of cancelling privileges as regards some liabilities.

Today, we have made the decision in favour of additionally increased required reserve ratio for FX deposits. This measure is designed to discourage growth of FX liabilities of banks, but will also have an indirect impact on the terms of transition to liquidity surplus.

To preserve the desirable tightness of monetary conditions and ensure a better performing transmission, we stand ready to apply measures of macroprudential regulation. In particular, the Bank of Russia decided to cancel anti-recessionary regulatory eases on unsecured consumer loans. When this segment expands at rates exceeding households income growth it can carry inflation risks.

Another factor we considered when deciding on the key rate is output of goods and services and production activity.

These dynamics have exceeded our expectations, and these developments are not accompanied with higher inflationary pressure. The Russian economy really becomes more resilient to external developments. In the first quarter, GDP shrinkage was below the forecast, despite the drop in oil prices at the beginning of the year. Importantly, these are not only improvements in the oil market that contribute to better economic environment.

 

The positive structural trends continue to develop. Import substitution and non-oil-and-gas exports including chemicals and the food are growing. New areas of growth emerge - growth in production of some consumer goods (e.g. apparel and furniture) is taking shape. It points to lower supply-side inflation risks. However, the observed positive developments are still of local nature, non-homogenous in terms of industries and regions, and too small in scale to determine the overall economic dynamics.

We revised the economic forecast upwards taking into account the actual GDP exceeding expectations and more favourable external economic environment. Our baseline scenario envisages the downturn to run down as soon as in the second half of the year, with quarterly GDP growth entering positive territory. In 2017, we predict the annual GDP to grow (by 1.3%).

The revised baseline scenario provides for the oil price of $40 per barrel over a three-year horizon, which is slightly above the March forecast. However, we still stick to the conservative forecast. We expect prices to adjust from the current level, given the persistent oil glut and all-time high supplies. The price growth in April and May largely resulted from temporary factors, including supply interruptions and excessive optimism in global markets. A likely increase in the Fed’s rates may also have a negative impact on commodity and financial asset prices.

As for the balance of payments over the forecast horizon, we do not see any considerable risks here. The external debt is shrinking gradually and smoothly. We expect net capital outflows (i.e. the difference between capital outflows and inflows) to remain low by historical standards in 2016-2018 (not higher than $25-30 billion) There are several reasons for that. First, capital outflows under external debt repayment will shrink, according to the repayment schedule. Besides that, data suggest that companies and banks are mostly capable of refinancing it even with the sanctions in effect. Second, as the economic environment gradually improves, they will be able to raise funds from abroad more actively. Third, modest economic and income growth, as well as persistent difference in active rates in Russia and abroad, and stricter rules for opening deposits in foreign jurisdictions, will limit the possibilities for building up investments in foreign assets.

Credit institutions’ demand for the Bank of Russia’s FX refinancing will go down. We expect banks to completely redeem their debts on FX instruments, triggering the growth of Bank of Russia’s international reserves by $22 billion in 2016-2017.

The expected gradual economic revival will not hinder inflation reduction. Provided that consumers remain conservative and inflation expectations continue to go down, the recovery of demand will not outpace production recovery.

Nevertheless, inflation risks are still in place – this is another factor we take into account.

Materialisation of risks may result in slower than forecast inflation reduction calling for a tighter monetary policy for a longer period of time.

Major inflation risks currently stem from the domestic environment, possible changes in consumers’ and businesses’ attitude.

They may be manifested through excessive optimism and higher consumer spending that outpaces the production dynamics. This may result from fiscal policy easing (especially in social expenditures), wage indexation outpacing labour productivity growth, and a loss of savings attractiveness for households. For the moment, these risks do not impact on inflation considerably. An increase in nominal wages early this year has failed to result in a surge in consumer demand and an increase in retail trade turnover, though being slightly above our expectations. There is still uncertainty concerning medium-term strategy of the fiscal policy.

Inflation expectations of both households and businesses are gradually going down at the moment. Financial market data and analyst surveys also signal higher confidence in inflation reduction. This trend must be maintained and anchored for inflation expectations to decline to the levels our economy is accustomed to. Otherwise, the inertia of inflation expectations may cause inflation to stabilise at the level that exceeds the 4% target.

Another oil price drop is also not to be ruled out. Therefore, we still consider a risk scenario that provides for the oil price of $25 per barrel. In this case, inflation in 2016 will exceed 6.5%, and GDP will fall by about 1%. We estimate the probability of this scenario to be low.

Amid the persistent inflation risks it is essential that the monetary policy remain reasonably prudent.

A balanced approach to the monetary policy is relevant not only for inflation reduction, but also the economy as a whole. Its recovery should be a balanced one. Income and consumption growth should not outpace production and labour productivity growth. The Russian economy knows the negative consequences of such development all too well. These are unsustainable and low-quality growth and unmanageable inflation expectations.

Therefore, it is essential for both the macroeconomic policy and economic agents to remain reasonably conservative. This will enhance the currently observed structural shifts, and pave the way for high-quality economic growth, sustainably low price growth and low long-term rates for the economy. This transition is currently quite realistic, and, moreover, we have a good starting point. It is essential for us to retain the achievements and continue to move forward consequently and progressively.

Q&A for media

Reuters:

Could the current rate reduction be viewed as a start of a [downward revision] cycle?

Elvira Nabiullina:

It could not. We are really confident that the right monetary policy will enable us to deliver on our inflation target of 4% by the end of the next year, which suggests that there is some potential for further reduction. Having said this, the reduction path, i.e. when and by how much to reduce the rate, would ride on the economic environment and inflation risks, both those we see today materialising or new ones coming into play. Hence the cautious and balanced stance of ours. The potential is indeed in place, yes – but at this point we would decline to call this rate review as the definite start of a cycle.

Interfax:

Please comment on Bank of Russia bonds. What is the timeline for their issuance? Which volumes are expected?

Also, you mentioned that you do not rule out, beyond today’s revised forex liability ratio, the introduction of higher required reserve payments for ruble liabilities, too. Would you please explain the reasons for this potential move. What do you think is behind the need to increase the required reserve ratios?

ELVIRA NABIULLINA:

Thank you for the question. On the subject of Bank of Russia bonds. From the liquidity management perspective, we see no need for this move, given the current, albeit minor, structural liquidity deficit. Considering that we have been offering no such instrument, we stand ready in the near future, in the coming two to three months, to issue test bonds worth of several tens of billion rubles. In doing so, we will see the prospects for this instrument, we will see prospective demand for it.

We need to make preparations as we seek to feel market preferences; yet we could pioneer this offering even as structural liquidity deficit persists – in order to try this instrument out.

Regarding the increase in required reserve ratios – for forex liabilities – this move is based on our current policy of bank balance sheet deforexation [understood as gradual conversion of assets and liabilities into rubles]. This policy was announced some time ago and, as you remember, we rose these ratios for forex liabilities. This action is step two, and we foresee some positive impact from it, too, as it is supposed to slow down the onset of a liquidity surplus.

Now on the potential increase in reserve ratios for ruble liabilities. We treat this option as one of the instruments to help defer, let me say once again, the start of surplus liquidity. That is, this not a deforexation tool per se, yet the one for us to use in the transitory conditions as we switch to the surplus.

However, the issue needs to be discussed with banks so we look into its potential implications, the reason being the impact and the efficacy of this measure. The measure has always been within our set of tools, and its specific configuration would need to be discussed with market players.

Bloomberg:

This question is on the real rates. Even considering the current reduction of 50 bp, the key rate and inflation spread is still 3.2 pp. Which level of real interest rates does the Bank of Russia believe to be normal? A lot of economists are pointing to overly high rates given that the economy is in recession. Thank you.

ELVIRA NABIULLINA:

Thank you. First, how do you measure the real rates? These will not always be a correlation of the nominal rate to inflation: as businesses and individuals are making decisions in favour of either depositing with banks or lending to the economy, they will normally match the nominal rate to current inflation expectations, as long as in their actions they are focused on the future. Therefore, we look into real rates as we compare nominal rates to inflation expectations. And even such rates are still high enough.

Which would be a balanced or a normal real interest rate? Although there are various approaches to calculation, we estimate these to be on the order of 2.53%. Having said this, we have just embarked on the journey of inflation targeting and, with inflation expectations unanchored; we can and need to maintain our real rates at a level slightly above the equilibrium rates so as to anchor inflation expectations, thereby ensuring a steady rate of inflation. These are considerations we are guided by. Does that answer your question?

RIA Novosti:

Todays’ news release gives a somewhat different signal to the market, referring to potential rate reduction. Why is that, would it be correct to say that the text is more carefully worded and less precise, in a way?

ELVIRA NABIULLINA:

Last time our message was that we could decide to reduce the rate at one of the forthcoming Board meetings. In point of fact, this is what we have done. Yet, as I took the time to explain, for us to contemplate a further rate reduction, its timing and extent, we need a lot more information, in view of the persistent inflation risks. The overall inflation performance, as we see it, is positive, and we feel more confident that we are on the way towards our 4% target.

Reuters:

There is a recognition that the so-called Brexit risks remain undervalued. How would toy estimate the extent of the fallout for the Russian economy and financial system, should the UK decide to leave the EU?

ELVIRA NABIULLINA:

The Russian economy is not directly exposed to the risks of Brexit. We certainly cannot rule out some indirect risks. This is because Brexit would have certain repercussions on the EU economy – one of our major trade partners – and for the financial markets overall. These include higher turbulence, which is set to reflect on commodity market movements and on our economy as a result. Nonetheless, I see no direct or material enough risks to the Russian economy here.

Kommersant:

The current combination of the pretty high rate and guaranteed low inflation, at least as you expect, is an ideal carry trade scheme. Do you foresee any growth in risks related to carry trade in the third and fourth quarters? And how are you going to address this?

ELVIRA NABIULLINA:

This is really the case of a certain differential being still in place. But we see no such big risks, or big carry trade volumes now.

TASS:

Mrs Nabiullina, the ruble has been showing less volatility since probably March, and the volatility is currently fairly low, too. Do you regard the current forex market as favourable for the Bank of Russia to resume its foreign currency purchases to replenish forex reserves?

ELVIRA NABIULLINA:

The ruble has really been less volatile recently, on the back of several factors. First, this is the overall oil market developments and, on the whole, the fact that market agents are growing increasingly accustomed to the floating rate regime with some more hedging of their forex risks.

On the subject of active market operations to buy forex reserves. Our baseline scenario provides for no such plans until late 2018. We will be watching the developments closely, but we currently make no provisions for this action.

Rossiiskaya Gazeta:

Mrs Nabiullina, please confirm I got it right: it is through forex liquidity absorption that the Bank of Russia intends to prevent the interest rates from lowering to a level triggering a consumer market rebound?

ELVIRA NABIULLINA:

We support any rebound in the consumer market. It is supposed to begin to revive, as we think, as envisaged in our forecast, but its pace of expansion, however, should trigger no inflation growth, that is, its expansion should match the domestic industrial output and similar indicators.

There are indeed risks, that is, potential risks, that unsecured consumer lending might start recovering too rapidly, which we have seen in the past two months. These signals are not too strong though to see a real trend evolving.

This is the reason why we thought it possible and appropriate to come back, at this moment in time, to the 2015 macroprudential policy of having an elevated risk ratio on unsecured consumer lending in the range of 25% to 35% of the effective interest rate. We abolished that discount, we had an elevated ratio of 1.1 but cut it to 1. The decision we have made is to reinstate this higher ratio from 1 August to put unsecured consumer lending on an appropriate growth path, where it brings no inflation risks, among other things.

As regards our liquidity absorption overall, the toolset for these operations is nothing new. Now and then I hear some bankers and experts giving surprise opinions, claiming that surplus liquidity will nullify the central bank rate and enable them at last to set their own course as much as interest rates are concerned. Their own course, I admit; the key rate will however keep a role in the economy and will determine the structure of rates, it’s just that this role will be different.

We are set to influence rates, short-term rates of the money market, through our absorption schemes. Our premise will be that these rates should be in the midpoint of the corridor, perhaps somewhat tilted to the downside than upside. And, certainly, our key rate will be a point of departure for banks as they place, rather than attract, funds – because of our deposit auctions. These would enable banks to place funds in the safest, risk-free way. And then, they will be analysing the performance of their deposits and their loans.

This is why our rate will still determine the correlation of these rates, so we would be quite confident that this mechanism will help us deliver on our inflation target.

Rossiiskaya Gazeta:

Please tell us on your GDP forecast in the baseline scenario. Are there any updates?

ELVIRA NABIULLINA:

Yes, there are. We have upgraded our GDP forecast.

As I told you, we think that quarterly rates are expected to return to positive territory no later than in the second half of the year, and, although we still expect annualised negative readings, these are set to be better than our warnings. The range, as things stand now, is -0.3% to -0.7% for the total year. The earlier projection was -1.3% - that is, we see quite a better GDP forecast for this year.

Lenta.ru:

Ms Nabiullina, as you spoke you mentioned twice the uncertainty surrounding fiscal policies. Which action do you expect from the relevant decision-makers, from the Ministry of Finance, in the first place? Which would be the budget environment for the Central Bank to reduce its rate more aggressively?

ELVIRA NABIULLINA:

What we look to is the understanding as to what is the trajectory for deficit reduction in the next three years. Our assumption is, budget deficit should diminish, and we support the RF Ministry of Finance here with their consistent view that deficit should be cut back by one percentage point each year. However, for us to get the needed clarity on budget policies, we need this decision made. And, second, this decision should be supported with the relevant revenue / expenditure decisions. Once these are in place, both the Central Bank and all market participants will be clear on what the budget strategy is.

Whilst we treat the Ministry’s option as realistic enough to base our assumptions on, budget risks are still a consideration for us.

Vedomosti:

You mentioned that a potential further rate cut would ride on two risks materialising or failing to materialise. I refer to the inertia of inflation expectations and fiscal policy. Is your approach dependent on both these risks, or, would the situation when either of the two fails to materialise be sufficient reasoning for the revision?

And a second question, if I could. On previous occasions, you spoke on the Fed’s policies as yet another risk, an uncertainty factor. This time, you make no mention of this. Does that mean that you have clarity as to Fed policies for a certain time, or you have factored in the planned rate hike in your decisions?

ELVIRA NABIULLINA:

We will certainly look on these two risks together. Both of them, the risk of inflation expectations and the risk around fiscal policies, are key. Hence the need to look into the combination of these two. As we make rate decisions, we always analyse market factors. These two are currently viewed as key proinflationary risks, so we will be monitoring them closely.

Regarding Federal Reserve System policies, as we make our decisions we assume the rate increase to be smooth and ensure fairly efficient management of market expectations. And this is very much the case now. Our forecast is based on one or two upgrades in the course of the year. Yet again, we assume this upgrade to be smooth and lead to no additional turbulence in global financial markets.

Reuters:

Considering all the recent steps the Bank of Russia made to regulate forex liquidity in the banking sector, can you see any potential or probability for negative interest rates in the banking sector? Thank you.

ELVIRA NABIULLINA:

No, I cannot – we see no risk like that. Let us call this a risk. These rates have been diminishing in the recent months, still remaining in positive territory and attractive to depositors. There was a certain drop in dollarisation, albeit on the back of the recent dollar strengthening. We see no dramatic change from the viewpoint of foreign exchange deposits. And, we see no risk of them hitting negative territory in any foreseeable future.

RIA NOVOSTI:

Ms Nabiullina, was there a review in the BoR forecast for inflation of the risk scenario for 2016, 2017 and 2018? More precisely, for 2016 and 2017? For 2017, you projected 5.2%, is there a new projection now?

ELVIRA NABIULLINA:

True, we have updated our inflation scenario. We admit that, with the oil price of 25 dollars a barrel, we are very much unlikely to deliver on our inflation target of 4% in 2017. Inflation could then be higher, possibly, higher than 5%. And in 2018 it would be between 4% and 4.5%.

Having said this, the odds this scenario would materialise are slim – it is a lot less likely than previously projected.

Reuters:

My other question is on forex repo. The thing is, with the balance of debt of some 14 billion dollars, you gradually changed it from an annual to a monthly segment. What is your next step likely to be? Perhaps, you will be seeking to reduce this debt through cutting action limits? What are the next steps here?

ELVIRA NABIULLINA:

True, our calculations assume a fairly smooth repayment of the debt to the Bank of Russia under repo operations. In this connection you will read it in our Monetary Policy Report that the plan is for foreign exchange reserves to grow by 22 billion US dollars in two years, that is, between 2016 and 2017. Yes, 15 plus 7 billion dollars – all in all, 22 billion in two years. And these are repo repayments.

It is just that, unlike before, we see no demand for this facility in the market, thanks to the current fairly comfortable state of the forex market.

TASS:

Can you see that the dependence of rates in the economy on key rate movements is receding, as a market trend? Do you think this involves any risks?

ELVIRA NABIULLINA:

We see no such trend emerging. Rates in the money market depend on the key rate. What we are seeing is the expected softening in monetary conditions, with diminishing deposit and loan interest rates, driven by a lower structural liquidity deficit. We took all these factors into account as we were making our decision last time, as much as this time – so there is no uncontained movement.

Bloomberg:

It is a done thing to refer to central banks as either doves or hawks. Given today’s downgrade, how would you define your policy in these terms?

ELVIRA NABIULLINA:

Well, central banks will not define themselves, they will leave this to the market. So let market participants decide.

Rambler:

Ms Nabiullina, please tell us when you expect the practice of optimistic scenario building to resume?

ELVIRA NABIULLINA:

We already have a lot of optimistic scenarios, you know. We could have a look at our past scenarios. We could certainly update them – we’ll see when this needs to be done. But I think we have enough of them.

Seriously speaking, we are going to do this once we look into our Guidelines for the Single State Monetary Policy for three years ahead. I think we will specify there which scenarios we need and which three years’ scenarios will be needed.

Reuters:

Is this the correct understanding that you plan to start selling BoR bonds in a test mode once you have sold out liquid OFZ in your portfolio? No? Are these two interrelated?

ELVIRA NABIULLINA:

No, these two are not interrelated. First, the balance we have there is about 78 billion rubles and low liquid securities. We will sell these as market opportunities arise. That’s why, regardless of the time we sell out the balance of our current securities, we are going to make a new offering as we are prepared.

RIA NOVOSTI:

Ms Nabiullina, another question, please. Does the Bank of Russia see a sustainable trend towards ruble appreciation? Or, rather, the Bank thinks the ruble remains unsteady?

ELVIRA NABIULLINA:

In the baseline scenario, we see no drivers of higher ruble volatility for the foreseeable future. The ruble movements will be determined by market factors.

Life Agency:

Ms Nabiullina, which oil price does the baseline scenario assume?

ELVIRA NABIULLINA:

40 dollars a barrel in the next year and in 2018. For this year, the reading of 40 dollars a barrel is a baseline estimate, to be reached by the end of the year. Yet the year average is 38 dollars a barrel.

Let me stress again, we are pretty conservative here. More conservative than most current forecasts and consensus forecasts. And with good reason.

Vedomosti:

In the BoR Board meeting followup statement, the Bank of Russia notes that the tight direction of its monetary policy holds, while at the same time it mentions a potential further rate reduction to be discussed at the next meetings. Is there some sort of contradiction here?

And, second. How long do you think the Bank of Russia could maintain its moderately tight monetary policy? Thank you.

ELVIRA NABIULLINA:

Moderately tight monetary policy can and will hold even as we decrease the rate. Moderately tough monetary policy is a policy leading to reduced inflation rate. Real rates remain slightly higher than the long-term equilibrium level. This is, as I said, between 2.5% to 3%. Our real rates will be determined by inflation, that is, they are going to be slightly higher than this level and slightly higher even once inflation settles at 4% by the end of 2017. That is, we need some time to anchor inflation expectations at lower level and to get inflation to settle at the 4% target steadily.

We try to avoid a situation where we reach the 4% target and then inflation surges. We seek to ensure sustainably low inflation driven by sustainably low inflation expectations. This is what we are after.

RIA NOVOSTI:

Some time ago, several fiscal rule options were discussed for the next three years. And the Ministry of Finance declared that new fiscal rules make no sense unless the Central Bank makes forex interventions. That is, this option is under discussion, isn’t it? Is this fiscal rule option thought to do no harm to inflation targeting and the free-floating exchange rate?

ELVIRA NABIULLINA:

My position is that any fiscal rule should be designed regardless of central bank forex interventions. That is, our intentions exclude any influence on the exchange rate through our operations. Our exchange rate is market-based.

Having said this, I fully support the need for a fiscal rule as a tool to ensure, among other things, better resilience of budget expenditure to external environment. This is what our economy needs, what we need to ensure our social commitments are met in a sustainable manner. I guess these issues will top our agenda shortly. This is exactly one of the attributes to make our mid-term fiscal strategy more definitive. Whenever we refer to uncertainty, each time this includes the rules to govern excess cyclical budget revenue.

TASS:

Ms Nabiullina, does the Bank of Russia make provisions for a second pension indexation, which is being so much talked, as it makes further monetary policy decisions. Do you think this move would make proinflationary pressure? And, do you think this move is really indispensable? Thank you.

ELVIRA NABIULLINA:

Yes, the fact that this issue is outstanding, with discussions ongoing, indeed generates an uncertainty risk in fiscal policy. As we were making the decision today, we proceeded from uncertainty risks and the risks of the lack of specific configuration.

RIA NOVOSTI:

Does the BoR expect a hard landing in China this or next year?

ELVIRA NABIULLINA:

Our assumptions are based on a managed slowdown in growth of China’s economy, as well as a fully controlled transition from one growth model to the other, a domestic consumption and services-based model. But we always take into account the risks related to the global economy overall. And this suggests several scenarios including the risk one, where a barrel is 25 dollars and a variety of negative factors alike are coming into play.

Bloomberg:

Let me ask you a question on ‘Simple Economics’, a BoR social media project. What do the BoR executives make of the final impact? And are you getting any feedback from the target audience given that comments are disabled there?

ELVIRA NABIULLINA:

We are. And this feedback varies. It is on the list of our priorities to tell our citizens and market participants, in a more clear language, about the functioning of the financial sector, the monetary sector, about the way we make decisions – because this is, among other things, about management of expectations in the economy.

This is why it is our intention to continue this project. And I welcome all your suggestions and ideas for its improvement. Thank you.

Statement by Bank of Russia Governor Elvira Nabiullina in follow-up of Board of Directors meeting on 10 June 2016