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Statement by Elvira Nabiullina, Bank of Russia Governor, in follow-up of Board of Directors meeting on 18 March 2016

Statement by Elvira Nabiullina, Bank of Russia Governor, in follow-up of Board of Directors meeting on 18 March 2016

 

The Bank of Russia today has decided to keep its key rate on hold at 11% per annum.

Why have we taken this decision? It is true that in February – early March, external conditions and the situation in the Russian economy and in the financial markets improved. Oil prices picked up, inflation declined, recession slowed down, and the ruble appreciated. However, there still remains high uncertainty with regard to further oil price dynamics, other external conditions, as well as the sustainability of positive trends recently observed in the Russian economy.

Given the situation, it would be sound not to act rashly to prevent moving in the opposite direction afterwards. Stability and caution in the monetary policy are very important. We must ensure a steady path of reducing inflation to our target of 4% by end-2017. We are perfectly sure that only low inflation is a guarantee of stability and low interest rates in the economy. In order to keep interest rates steady and low, we should first ensure sustainably low growth rates in consumer prices and a decrease in high inflation expectations. Then, proceeding from this, we will have stable and low interest rates. This requires a consistent and gradual interest-rate policy of the central bank. That is why the Bank of Russia may pursue a moderately tight monetary policy for a longer period of time, then assumed earlier, to achieve the inflation target.

Now, I would like to indicate the factors taken by the Bank of Russia into account while making the decision on the key rate. Firstly, this is a change in external conditions, in particular, oil prices and risks posed to oil prices and global economy in general. Secondly, inflation dynamics and inflation risks. Thirdly, economic dynamics. Fourthly, fiscal risks.

Let me give more detail on the trends and risks I have outlined.

External conditions

We have reviewed our baseline scenario and now proceed from the fact that the average price of Russian Urals crude will be equal to $30 per barrel in 2016. It will rise then gradually to $40 per barrel in 2018.

In the past few weeks, we observed a certain recovery in oil prices, but how long it will last? Price recovery is more attributable to market expectations of future price changes, rather than actual changes in the oil market. The global oil market continues to see excess supply and a record high level of stocks. This is suggestive of oil price risks.

Oil prices are hard to forecast. The Bank of Russia proceeds from conservative estimates in order to be prepared for any developments in the oil market.

The persistently high uncertainty regarding world economic growth outlook is also viewed as an important factor by the Bank of Russia. The central banks of most developed countries continue pursuing soft monetary policy trying to overcome the threat of deflation. However, financial markets dispute the efficiency of the soft monetary policy in the current conditions. As a result, volatility in the global financial markets remains high.

Inflation

The recent data of 14 March suggest that annual inflation is 7.9%. In the February to March period, it was decreasing somewhat quicker than we expected in January. We expected it to be at 8%-9% for the end of Q1. This takes me back to the 9% reading for March 2016 we forecast a year ago. Average daily price increment in March was at this year’s low. This performance is explained by several reasons.

First. The constraints from the demand side are growing. Inflation is constrained by weak consumption as the monetary policy remains moderately tight and the fiscal policy – conservative. The growth rates of nominal wages are all-time low, both in the public and private sectors. Furthermore, decreasing is the pressure on prices from the side of producers’ payroll costs. Additionally, the deteriorating external climate is set to impact on domestic demand.

Second. The dwindling share of imports in consumption serves to downplay the response of domestic prices to the exchange rate fluctuations. The share of imported products in retail sales for 2015 is down to 38% from around 44% seen between 2012 and 2013. The response of households is also of relevance: even as the ruble was weakening strongly, no upsurge in demand was seen from households in December-January. The resulting pass-through of exchange rate effect to inflation is continuing to decline gradually, it currently totals around 0.15-0.2. This is the second driver, positive-working in terms of inflation processes.

Third. The global downward trend in the price of food is ongoing. This impacts positively on imported food prices and costs in the food industry. As a result, domestic annual food prices were growing in February slower than prices for non-food goods and services. Production costs are also pushed down somewhat by the declining global energy prices.

Our estimate suggests that inflation decline will continue. This will occur, driven mainly by the factors I have mentioned: low demand, the current monetary policy, a moderate impact from the exchange rate and decreasing external prices.

This refers to the decline in monthly and quarterly inflation. Annual price growth rates may accelerate in the middle of the year, but only on the back of the low base effect of last year. This is a statistical effect. In the second half of the year, as our forecast suggests, annual inflation is set to resume its decline, provided there are no new shocks emerging. Some pressure on 2016 prices is envisaged from increased excise duties, those on fuel in the first place. Yet its input is expected to be minor: circa 0.5 percentage point into annual inflation inclusive of all types of effect. Our baseline scenario suggests that annual inflation will total under 6%, decreasing to the 4% target in late 2017.

Inflation risks

Importantly still, inflation risks, that is, the risks that inflation may cease to decline or decline slower on the way to the target, remain high. The core risk sources are as follows.

- First. Oil market instabilityI have covered this.

- Second. The risk that elevated inflation expectations would remain. They are currently resuming to decline, but they remain high. It is crucial that the trend towards reduced expectations remains and becomes more sustainable. In the first place, this must be prompted by slowing actual inflation; however, confidence in the Bank of Russia-implemented monetary policy is here of crucial importance, too. We are concerned about elevated inflation expectations expressed by professional analysts and economists.

- Third. Here we are faced with several uncertainties surrounding budget configuration, in particular, the prospects for extra indexation of pensions and wages. This risk source may be the most important. A balanced fiscal policy is essential for the economy. Given the change in external conditions, a ceiling on deficit and budget spending growth must be set down. Here we need a mid-term clear strategy to reach balanced budget so that all economic agents are fully knowledgeable about budget deficit over three years’ horizon and about the sources of its funding. A consistent and responsible policy is a precondition for stable economic development, as well as key prerequisite for lower inflation and financial stability risks. Analysis shows that, all other things being equal, more conservative fiscal policy allows for softer monetary policy, and vice versa.

- Fourth. The prospects for a turnaround in the global food prices. This would also have negative influence on annual and monthly inflation in Russia. As is usually the case for this time of the year, there remains uncertainty surrounding Russian crops, which would potentially have influence on 2016 prices.

We recognise all these risks as we make our key rate decisions.

Economy

At the beginning of the year, the dynamics of the economic activity were somewhat better than we expected considering the downturn in external conditions. The annual slump rates in consumption and investment are slowing down, with unemployment still remaining low. In February, the annual growth of industrial production became positive although it is too early to view this tendency as steady.

We see the economy is quick enough to adapt to a new reality due to the positive tendencies which evolved last year. The floating exchange rate softens the influence of external shocks. The ruble depreciation boosted competition which supports agriculture, food, chemical and mining industries. There are signs of growth in the industries oriented to import substitution and exports, including non-energy exports. Besides, as for the economy structure in general, it is obvious that the so-called tradable sectors (the output of these sectors can be imported and exported, and sold in external markets) are in a better shape when compared to the non-tradable sectors which include, for example, trading sector and construction.

The economy adjustment to a low level of export prices is not yet completed. According to Bank of Russia estimates, the economic recession in 2016 will slow down.

Structural liquidity deficit reduction

In making its key rate decision, the Bank of Russia also takes into account the dynamics of interest rates in the economy and ruble liquidity developments.

A gradual transition from banking sector liquidity deficit to surplus is possible in the near term. It could happen as early as 2016. Liquidity surplus means that banks’ demand for central bank deposits exceeds their demand for refinancing. The main transition factor is liquidity inflow through the budget channel. It is possible when budget expenditure exceeds its income, which is mainly financed mainly by the Reserve Fund.

In the course of this transition to surplus, money market rates might shift slightly within the Bank of Russia interest rate corridor, moving from its maximum to the minimum. Besides, amid liquidity surplus the central bank’s rate would rather act as a reference rate for the deposit rates, than for the lending rates of the banking sector. As a result, a minor easing of monetary conditions is possible even under the unchanged key rate. We will continue to closely analyse liquidity developments and take them into account as we make decisions on the key rate.

At the same time, it is worth noting that the existing system of instruments enables an effective rate management both under liquidity deficit and liquidity surplus. We can conduct deposit auctions. In view of the above, the key rate will remain an ‘anchor’ for money market rates and other rates in the economy after the structural surplus emerges. Besides, we have a set of additional measures at our disposal to reduce liquidity surplus or slow down the transition to it.

Now, a few words about the new forecasts and scenarios

We reviewed our baseline and risk scenarios with different oil prices. We reduced oil price assumptions for both scenarios. The updated baseline scenario suggests a sluggish recovery from the average of $30 per barrel in 2016 to $40 per barrel in 2018. This scenario is close to the risk one released in December. However, in view of current more positive economy and inflation dynamics, the forecast for economic fundamentals is somewhat more promising in the baseline scenario. We expect a GDP drop of 1.3-1.5% in 2016 and close-to-zero growth rates in 2017. GDP growth rate will become positive in 2018. The advancing processes of import substitution and non-energy export expansion will help a gradual economic activity recovery.

We also prepared a more negative scenario featuring a persistent oil price decline to a lower level, which will remain for quite a long time. In this case, we assume a GDP drop of 2-3% in 2016. Inflation will be more elevated than under the baseline scenario, exceeding 7% by the end of 2016. Currently, we assess the probability of this scenario as low.

Concluding remarks

In conclusion, I would like to speak about few more aspects of our forecast.

A few words on the balance of payments. We do not perceive any significant risks related to the current balance of payments. Our estimates show that under all scenarios external debt payments will be processed smoothly. Clearly, income from exports and current account balance will decline given lower oil prices: the baseline forecast assumes a drop to $40 billion in 2016 (4.1% of GDP) with a gradual increase to $50 billion in 2018 (4.1% of GDP). However, there will be no high capital outflows. According to the baseline scenario, the outflows will amount to approximately $40 billion in 2016, followed by a slight increase. Therefore, we do not expect any significant changes in the Bank of Russia international reserves. The risk scenario suggests a more prominent drop in exports, but also a little lower capital outflows than under the baseline scenario because of a contracted demand for foreign assets. However, the current account adjustment will be more substantial than that of the financial account balance. Under this scenario we consider an increase in the Bank of Russia foreign currency refinancing as possible.

Overall, our estimates show that in the mid-term Russian economy will adapt to changes in external conditions, even if they are more considerable. All our scenarios suggest that over three-year horizon the GDP growth will become positive and inflation will reach the 4% target.

Q&A for Media

QUESTION from Interfax:

Mrs Nabiullina, I have two questions. First, about the press release. In the press release you announce that the Central Bank will be conducting tighter monetary policy for a longer period of time than initially planned. Could you please enlarge on your understanding of moderately tight policy? What was the time you initially planned to pursue such policy, and what is the plan for this in the current context?

And, question two, forex assets and risk ratios the BoR planned to raise from 1 April. Is there a decision, that is, is there any regulatory loosing coming? And if the Central Bank raises the risk ratio for forex loans, how much do you expect forex lending to contract in 2016? Thank you.

ELVIRA NABIULLINA:

Why are we currently planning to pursue a tougher monetary policy than initially planned? First, let me remind you of what the initial plans were. You will remember that when last year we saw inflation data and economic fundamentals we predicted that the rate could be revised down at one of the three [Board] meetings to come.

However, given that the substantial deterioration in the external conditions late last year and early this year raised inflation risks, we refused to rule out, as we observed this sharp growth in inflation risks, an even a tighter monetary policy.

Meanwhile, we do take notice of the drivers which would impact on decline in inflation, and I have dwelt on these. As we see this trend growing sustainable in our scenario, we think we could proceed to decrease the rate. But, certainly, all this is possible on condition that there are no risks, no risk scenario materialising.

In any case, we had better stay away from a rate hike. This is not a very good policy to go down, then to go up and down yet again. As we see these risks, the policy being conducted is conservative, that is, we should be confident that the downward trend for inflation is sustainable, that the risks of failure to meet inflation targets abate, this being the precondition for us to reduce the rates.

This is the message in this phrase. Yet, certainly, the time for this to happen, which decisions are there for us to make, will all be subject to the data available at a Board meeting date. The next Board meeting is scheduled for late April, when would be the time for us to look into the performance of the current inflation, inflation expectations and inflation risks, that is, if these are coming into play or aren't. Hence this policy and the phrase in the press release.

As regards forex assets. We see that substantial forex loans from banks to the real sector could potentially give rise to certain systemic risks where borrowers have no forex earnings and take foreign currency loans.

And our regulatory steps are meant to limit such risk in the economy, primarily for borrowers. This is why we propose a rise in foreign exchange loan ratios; however, we intend to do this very smoothly, on a case by case basis.

You could see that under our proposal the rate of increase for these ratios was differentiated depending on a sector, and the raise is primarily supposed to cover sectors with surely no forex earnings. This is construction and real estate.

Together with the banking sector we are looking into the option of exempting from this mark-up factor companies which generate substantial foreign currency earnings and which insure their foreign currency risks in a natural way. The decision may be made once we have found a way to administer this [exemption], clear and transparent both to us and the banks. At all accounts, here we deal with the long-term policy of limiting currency risks some borrowers may assume as a result of underestimation.

QUESTION from Bloomberg:

On the subject of the move towards a ruble liquidity surplus. Could you please specify what were the assumptions for budget deficit and amounts to be spent out of the Reserve Fund for you to base this forecast? And, question two. Mr Siluanov (RF Finance Minister – Editor) said yesterday he left open the option of the Bank of Russia increasing the rate if budget deficit grows excessively. Can you please comment on this? And, what are the risks for the BoR to raise the rate this year? Thank you.

ELVIRA NABIULLINA:

Our baseline scenario assumed a gradual drawdown of the funds, and their estimated balance for the end of 2018 is on the order of m2 trillion, as we saw. Under the baseline scenario for this year, the reserve funds total roughly m3.8 trillion. Those were the estimates we were guided by. Without doubt, as the Government may update their forecasts we will be updating our figures. And, really, the onset of this structural surplus would ride on the rates these reserve funds are drawn down, the time this happens remaining to be determined. Neither can we specify the period within this year when this would occur; yet, we stand ready and would be reacting accordingly.

Let me say yet again that the transition from structural liquidity deficit to surplus is a major change, which implies - in a scenario of unchanged key rate - a certain softening in monetary conditions for economic agents.

It is imperative that we reach our inflation target without resorting to an increase in the rate, this increase is what we are anxious to avoid. That is, not only us, the overall economy wants to do without a rate hike. Positively, we need to control budget deficit so we can do without a rate increase and to keep inflation in check. Why are we discussing this? It is essential that a balanced fiscal policy is in place for, importantly, more than a year, that is, for three years - so we are confident in the consistency of the monetary policy we are pursuing and so economic agents understand how monetary policy would evolve.

This makes a balanced fiscal policy so crucial to us. I think this is exactly what Mr Siluanov meant when he was saying that the Central Bank could raise the rate if the deficit is too large. Also as I said, other things being equal, the tighter fiscal policy the softer monetary policy, and vice versa.

This is why we would like for both monetary and fiscal policies to be balanced: not overly soft and not overly tight, yet balanced and such as would enable the accomplishment of our inflation target while at the same time promoting sustainable economic growth.

QUESTION from Vedomosti:

Early this year, public surveys were showing, for the first time, trends sociologists would interpret to be emerging deflationary sentiment. That is, people are not willing to spend, not willing to borrow, but say that it is better not to deposit money but take it away. And, according to these survey authors, if this sentiment amplifies it could spark off a deflationary spiral in the economy. How relevant do you think are deflation risks for our economy? What is your vision?

ELVIRA NABIULLINA:

Yes, we have seen these survey data. Change in household behaviour is a weighty driver impacting on monetary performance. Propensity to consume or to save is of vital importance, as well as propensity to save in an organised or disorderly way. And yet we see no strong trend emerging here, despite the existing sentiment. Our analysis suggests that our three-year forecast excludes deflation risks. We expect disinflation, that is, reduced inflation, yet the scenario of inflation hitting negative territory is off the table.

QUESTION from Banki.ru :

Hello Mrs Nabiullina, Mrs Fedorova. I would like to ask you about the steps the Bank of Russia intends to make to strengthen, as you said, the trends towards a decline in inflation expectations. Thank you.

ELVIRA NABIULLINA:

Inflation expectations would decrease as a result of two drivers:

First. People would gain confidence that inflation is set to do down as long as the actual inflation is dropping. And, it is very important to us that the actual inflation continues its downward trend, that the case is ruled out when it is up and down, and then down and up. It is imperative that we secure a sustainably declining inflation trend, this being a condition for decreased inflation expectations. People tend to believe what they see in their daily life, when store prices change.

Second. Certainly, the trust in the Central Bank's policy is essential, people's confidence that even as we face proinflationary pressures, be it exchange rate change or change in oil prices, the Central Bank would always have the suite of tools to keep inflation in check and make it go down again. In this regard, we have seen that a weaker response, as we call it, of prices to the change in exchange rate early this year is in many ways a result of, among other things, tighter monetary policy and our focus on disinflation. And, moving forward, we intend to stay the course. These are probably the two drivers here that will have a bearing on reduction in inflation expectations.

QUESTION from Kommersant:

This time, you have an excellent, very transparent and explicitly clear press release. I have a question on something that this release, however, may never include, and neither can the monetary policy report. In a scenario of oil growing, short term, for longer than one month, above 50, which inflation background would you expect, and what would you do?

ELVIRA NABIULLINA:

Precisely, we try to keep from reacting to some short-term events, for sentiment, forecasts would change, and that is natural, subject to the developments over last week, so we may switch from being pessimistic to optimistic. It is therefore very important, as we analyse all trends, to see which is a sustainable trend and which is not.

And that is why in either case we try to leave some short-term drifts, as there may be, without responding, until we make sure the trend is truly of a long-term nature. Undoubtedly, if there are no risks to financial stability - we will always take action. As long as it is very important for us to understand what the nature of a trend is. This probably determines the answer to your specific question on oil prices.

QUESTION from Reuters:

What do you make of the continued ruble strengthening, is this a trend emerging? And, if so, what are the chances for the Central Bank to come into the market to buy foreign currency, carrying on with its policy of building up reserves, considering that you were doing, or rather starting to do this last spring, in a kind of traditional manner seen over several years. Is this the trend we are seeing now?

And my second question is about inflation forecast for late this year. Is the forecast still 7-8% as before? I am asking because your BoR analysts did not rule out 8%-8.5% in their forecasts. And what is your position with regard to the analysts' forecast that is different from the BoR official standpoint?

ELVIRA NABIULLINA:

Well, on the exchange rate. For the time being, we are not certain that this is a [sustainable] trend given that the determinants here could be volatile enough in the near future. So we see no sustainable trend - we need time to see. If we recognise the trend as sustainable, we will take action accordingly.

Concerning our purchase transactions, replenishment of reserves, we could initiate this regardless of the exchange rate but once we are sure we are dealing with long term exchange rate developments, not temporary. For it would be just as wrong, like the case before, to enter the market and then, as higher volatility sets in, to leave again. Naturally, the step would be determined by professional judgement to an extent, that is, by judgement on the stability of the current situation, but generally, yes, we will be doing this.

Once again. We are in no hurry to replenish our gold and currency reserves, they are sufficient. That is why we will make decisions as determined by forex market developments.

And now as regards our inflation forecasts. For late this year, the baseline forecast is 6%-7%. True, some time, several months, ago I made this forecast public, and it was our draft forecast. Just as you would often ask, 'What is your draft assessment?' And we say that this tentative draft estimate was between 7% and 8%. Yet we see now the actual inflation fares pretty well, better than expected, and I spoke of this before - better than the forecasts we made in January. This has led us to improve our inflation forecast for the end of the year to 6%-7%. But you see the range here is pretty large at 6%-7%, which is explained by a number of uncertainties and inflation risks we referred to.

QUESTION from RIA Novosti:

Hello, Mrs Nabiulina. According to the Central Bank's press release, the regulator sees the risks that inflation may go astray from the 4% target by late 2017. And still, what assessment of the deviation risks does the Central Bank have: high, medium or low? And, my second question, I would like to ask you about the US and EU recommendation to their banks to stay out of Russian sovereign bond placement. How appropriate do you think is the expertise and the experience of Russian banks in bond placement? And can Russia do without western banks here? What do you overall make of these statements? Thank you.

ELVIRA NABIULLINA:

As regards the risks of failure to meet inflation targets in 2017. Our baseline scenario assumes the target is accomplishable, standing at 4%. Under the risk scenario, the inflation forecast for late 2017 is 5.2%, that is, the failure risk is high enough. The baseline scenario assumes, with due account for the lags of our monetary policy, all the capabilities to hit this target through, among other things, our policy measures, that is, through our moderately tight monetary policy, so we could be certain the target is accomplishable.

As regards several governments' recommendations to their bank to stay out of Russian sovereign bond placement. There are other markets [for this placement], so I hope we could use the opportunities available there. But, on the other hand, financial markets overall show some interest in Russian assets. We see this, we see investors beginning to show interest in Russian assets, and this is clear from a number of financial indicators, data, spreads, etc. There are however certain constraints.

I hope the RF Finance Ministry will be pursuing the appropriate policy so they can, together with banks, raise the required funds. And, the Finance Ministry has the capability to replace the required funds with what could be borrowed domestically. The capacity here on the domestic market is fairly good.

QUESTION from TASS Agency:

Let me ask you a kind of strategy-related question. Do you think it would make sense to set, just like some other central banks did, rather than an inflation target, a certain corridor, e.g. not 4% but 4%-6%, in connexion with the risk of failure in inflation target in 2017? Or, alternatively, perhaps you could link it more to a GDP target, just as some other central banks do? Thank you.

ELVIRA NABIULLINA:

Well, still most central banks set their targets as those for inflation. There are some, with dual mandates, but mainly this relates to the employment market, and not specific GDP shares. In theory, we did see some discussion as to the feasibility to target nominal GDP, but in practice none is doing this because this is a very complicated process to support with statistics and to administer, and there are no benefits here, that is, no benefits in nominal GDP targeting compared to inflation targeting.

With regard to the flexibility in the target. Principally, our inflation target is flexible. And none of the countries which target inflation breaks it down to a daily indicator of, say, 4%, or 2%, in case of the advanced economies.

And, as we discuss the 4% target, we say that it should total 4% for a certain time period, with little deviation.

You will remember that as we were beginning to discuss the target and introducing the targeting approach, there was a 1.5% variance in our corridor, to account for a variety of uncertainties to enable us to respond, through our monetary actions, to multiple developments including one-off factors. But now, with the current inflation so distant from our target, it makes no sense to discuss this corridor, in our opinion. We need to hit the 4% first, and thereafter we could speak on these deviations. And, our understanding of this corridor has always been 'target plus': 4 plus 1.5%, that is, the Central Bank kind of makes an allowance for itself in terms of higher inflation. And that is really the corridor and 1.5 more or less. Once we reach the target and can sustain it, not just make it there once, we could then discuss it.

Yes, this could be on our agenda. This could be the subject for the Guidelines for the Single State Monetary Policy, to be developed soon for the next three years. And I think we could look into the range of this flexibility, as well as the corridors. Thank you.

QUESTION from Rossiiskaya Gazeta:

Mrs Nabiullina, considering the Central Bank's monetary policy could remain moderately tight for long enough, do you look into the option for expanding project financing and, generally, alternative channels of investment project funding?

ELVIRA NABIULLINA:

I am going to cover the project financing question, but I thought there is more to say on the moderately tight monetary policy.

Moderately tight monetary policy is not necessarily about increasing or holding the rate because, as you see the actual inflation go down, your monetary policy may remain moderately tight even as the rate gets reduced somewhat. We speak on the nature of this policy that is precisely meant to drag down inflation. That is why the need to compare the current situation and inflation risks. This is just a remark to explain what is our understanding of moderately tight monetary policy.

As for project financing and special-purpose instruments in general. We really have dedicated facilities that we use to provide funding to banks at a reduced rate or for a more extended term. In the current development as we are faced up with the move from structural deficit to surplus, we look into the efficiency of these rates. One thing, you have a 300 billion ruble limit to draw down on dedicated facilities and you provide 4-5 or even 8 trillion rubles to the banking system and, the other thing, you provide less than one trillion of liquidity to the banking sector, and we might face a situation where we would need to absorb this liquidity. These instruments here have different implications for monetary policy.

That is, we could use the special-purpose instruments in a way so our monetary policy signals are kept undistorted. This is a key principle. For one. And that means that we have no capability to raise overall spending, annual spending, through these dedicated facilities. And that means we could treat very carefully the efficiency of these expenditures. It is all about efficiency, as this is a rare instrument.

We are conducting this performance analysis. Let me tell you, this does not mean that we would cover all instruments. Today, for instance, we have decided to increase the limit of financing for EXIAR by m25b, and the limit for SME support by m25b. EXIAR has exhausted the limit. And still, 25 billion is less than, say, 50 billion for last year. Yet we have extended this limit, analysed the programme carefully. Admittedly, this programme is used for very good projects. Likewise, we decided to allocate additionally 25 billion to SME.

On project financing, we have the doubts we have expressed. That is why, as I believe, the project performance analysis shows that there are many projects which commercial banks could provide funding for on absolutely commercial terms. And this rare resource of ours should target exactly where it promotes technological change, which the market is unable to fund because of dips or for the lack of long-term money. And this is why we see no capability to extend the limit in the project financing programme. Let me remind, the limit was drawn down by some 70%, unlike EXIAR (100% there), same thing for SME, about m40b of m50b was spent. And, anyhow, the decision on other support tools, other than EXIAR and SME, as we believe, could be made only after we have made certain that these rare tools are really working for the tasks as intended.

QUESTION from Lenta.ru:

Mrs Nabiullina, Mr Gref spoke out recently that banks' demand for the Central Bank funds is currently minimal, and, accordingly, the impact of the key rate is lowered.

Would you agree on this, and which additional facilities the Central Bank could operationalise?

ELVIRA NABIULLINA:

True, banks show lower demand for the Central Bank refinancing. And this is what I had in mind as I spoke on the move from structural deficit of liquidity in the banking sector to structural surplus. Overall, the banking system experiences a minor structural liquidity deficit. Meanwhile, some banks do show surplus, and some have deficit. It varies across banks.

We could bring about a situation when banks would need no money from us. They could get enough through the budget channel, their deposit base growing etc.

In this scenario, would we be able to control interest rates? We certainly could. It is a matter of the transmission mechanism, which would change. While prior to this banks were looking upon our refinancing as a certain indicator for the costs of funds, in the current setting we would either hold a deposit auction or take another approach, so they treat this as an indicator of the rate for risk-free and fairly profitable use of their funds. This is why we could, certainly, control the rates. And they would be kept in our corridor, this being the key rate, one percentage point more or less. In the context of structural deficit, the rate will often be in the upper part of the interest rate corridor, that is, within the 1-percent range above the key rate. However, we had previously short structural surpluses, when we held deposit auctions to absorb such temporary liquidity from the market. The rate could just stay in the lower corridor for longer.

Let me tell you again, we took this into account as we understood, among other things, that the switch from one situation to the other is a certain softening of monetary conditions for banks. This is what you speak about, and what Sberbank CEO spoke on.

QUESTION from RBC Media Holding:

I would like to ask you to specify scenario parameters. Is my understanding correct: there are two scenarios now, and you forego the optimistic one? And, is it correct that the key parameter to impact on the variance in scenarios is the price of oil? The spread is not that large, at $25 or $30 a barrel. And what else is behind the variance in the scenarios?

ELVIRA NABIULLINA:

Thank you. Yes, we have really only two scenarios now, having skipped the optimistic one. But we have a whole set of scenarios we developed as baseline ones. And all of these could be regarded as optimistic, I guess. Now, the two [operational] scenarios are a baseline one and an optimistic.

In Year One, 2016, these are really not very different from each other: The oil price of $30 and $25, and then this difference grows. That is why in Scenario One we observe, slow, but still recovery in crude prices to $40. And in Scenario Two, these are sustainably low prices, $25 a barrel. And that is another situation. That means, if discussed in terms of potential growth, shrinking economic growth, as you see that prices on export commodities remain low for long. Hence the difference in many indicators including GDP and inflation. I have already said that our risk scenario assumes a high probability that we would fail to meet our inflation target in 2017. And, accordingly, GDP would drop deeper in the risk scenario.

The Monetary Policy Report, due to be published tonight, will detail the baseline scenario and give a good presentation of the risk scenario, too, with some data.

QUESTION from TASS Agency:

Thank you very much for the press conference. A question indirectly related to monetary policy. On many occasions did the Central Bank announce that it investigates all dubious forex activities to make certain there are no speculations. There were two cases of these found last year, I think, on 29 October and in December 2014. Is the investigation for these complete now? Has there been any suspicious activity the Central Bank may have seen since the start of the year? Thank you.

ELVIRA NABIULLINA:

True, we analyse each and every occurrence in the forex market, especially the cases of abnormal movements or volatility. As I remember, the market was highly dynamic on 30 October. And we investigated this. And we found no signs of forex market manipulation.

The markets are currently showing high volatility. And investors will often be guided by, and that is natural, expectations and a whole range of data being unleashed; no matter what, we screen the market for potential manipulation so as to prevent this. Thank you.

QUESTION from Reuters:

Mrs Nabiullina, as we are approaching the end of March - the time the Central Bank was planning to make a decision, by 1 April, on the preferential exchange rate used to calculate N6 ratio, that is, to keep it or cancel it. Has there been a decision made taken into account that the ruble was strengthened somewhat and your view that this is no sustainable trend? That is, are you planning to extend this benefit? Thank you.

ELVIRA NABIULLINA:

We are planning to hold with banks a final verification related to this. As for me, I see no reasons why this benefit should be extended.

QUESTION from Interfax:

Will you please enlarge on the risks that pension savings could be frozen in 2017, are these taken into account in your macro forecast? And, in your view, what are the chances for the [freeze] decision to be made? In light of the active discussions around this, as I understand. Thank you.

ELVIRA NABIULLINA:

In macro parameters, we had rather taken into account the overall budget situation, deficit and especially the indexation level of pension / wages, which is impactful on consumer demand. For our forecast, this is probably immaterial, in terms of macroeconomic data on inflation and monetary policy. But, certainly, this is important in the long term perspective, that is, what is to become of pension savings. As I see it, there is really a risk this savings freeze may be enacted, because the external conditions are negative enough, and it takes time for the budget to adjust to these external conditions, and budget deficit needs to be controlled, and costs to be optimised. That is why, this risk does exist.

And, I think this risk will always be in place until we have come to a balanced pension system overall, including its PAYG component. Why does this risk exist? Because this PAYG component, or insurance pensions, are funded, in their considerable proportion, through intra-budget transfers. Were this a balanced system, we would not be exposed to this risk. That is why the key objective here is to come to balance in this system. Therefore, we are looking into certain proposals on how to improve the pension system, discussing them with the RF Finance Ministry so we keep the funded component, important in terms of long term pensioner rights, given our demographics, so we have the resource of long term money in the economy.

Statement by Elvira Nabiullina, Bank of Russia Governor, in follow-up of Board of Directors meeting on 18 March 2016