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Statement by Elvira Nabiullina, Bank of Russia Governor, in follow-up to Board of Directors meeting 15 September 2017

15 September 2017


Today the Bank of Russia Board of Directors has decided to cut the key rate to 8.50% p.a.

Let me dwell on the factors we considered while making this decision.

First, inflation has been held sustainably close to 4%. In August, the rate of inflation totalled 3.3%, following a short-lived rise to 4.4% in June. We regard these price fluctuations, triggered by temporary factors, to be small-scale and no cause for concern. They are not suggestive of inflation deviating from the target.

At this point, let me divert your attention and make some important comments.

With inflation having reached around 4%, we see the need for specifying our target. Our target is inflation close to 4%. We say ‘close to’ because it may go up and down around this reading of 4%.

Previously, we spoke on the horizon over which this target could be delivered – that is, we set up the target value for the end of 2017. At this point in time, this target becomes permanent.

We also discussed a potential numerical range for acceptable inflation deviations. Yet we believe it would be premature at this point in time. On a case-by-case basis, we intend to analyse and explain the nature of factors behind specific price movements. Such movements can vary in nature and the horizon of impact. Only if we see inflation moving away from target substantially and persistently, we will take corrective action.

Exactly because factors which trigger inflation deviation from target may vary in terms of nature and the horizon of impact, not every situation will call for responsive action – which is why we believe it would not be tenable to establish this range.

For instance, should poor crops translate into a substantial yet short-term off-target inflation episode which makes no impact on inflation expectations, we will refrain from action.

Conversely, if temporary factors prove impactful on inflation expectations and lead to a threat of persistent and durable off-target deviation of inflation, action on our part will be needed.

We also leave open the possibility to take preventive action, seeking to curb inflation deviating from 4% beforehand – if we see that this deviation is sustained over the forecast horizon.

And we will take no action whatsoever in the case of minor changes in inflation provided that it remains around 4%.

Let us come back to the present situation. This is exactly the case I have spoken on.

This summer’s inflation fluctuations from 4.4 to 3.3% are near-target and small-scale. Given the nature of price movements, we regard the current rate of inflation kept close to 4% as sustainable.

Inflation processes across product categories and regions are already fairly homogeneous. An increasing number of both products and services are posting annualised price growth rates within 4%. Growth in prices for products and services with little exposure to market fluctuations is around 4%. This is reflected in our estimates where instable and volatile components of the consumer basket are excluded.

Temporal inflation fluctuations are only natural, yet in Russia they are still substantial, which is attributed to structural pricing factors. These include a high proportion of imports in consumption and the pronounced seasonality of price movements in certain product categories. Their impact is amplified by unanchored inflation expectations. They combine to make inflation sensitive to exchange rate movements, global food market fluctuations and current crops.

Specifically, the volatility of inflation we have observed in recent months is indeed a consequence of fluctuations in food prices. Notwithstanding the recent investment in agriculture, there are still bottlenecks here. These are mainly storage and processing capacities and transportation. This affects the preservation of crops and leads to instability in food prices.

Although food price volatility in itself brings no risks to inflation anchored at 4%, it may be an impactful factor behind the speed at which inflation expectations are reduced. This, as a result, spells the need to maintain the required extent of tightness in monetary policy.

The second factor the Board took into account while making the rate decision was the decline in inflation expectations of both households and businesses - which resumed in August following a soft growth in July.

Currently, household inflation expectations are 9.5% and at an all-time low. However, this is still a high reading. Moreover, inflation expectations remain unanchored – that is, they remain highly sensitive to temporal factors. This is also true of corporate expectations. This nature of inflation expectations works to strengthen risks to inflation sustained close to 4% if certain shocks were to materialise. In these conditions, the case for maintaining a fairly tight monetary policy stance remains, which however also suggests a gradual loosening.

Third, assessments show that the current monetary conditions are being shaped by, beyond the past key rate decisions (which, incidentally, are only gradually translated into the economy) expectations for future BoR actions with regard to the rate - both short and medium term actions.

This finds its way in deposit and lending rates declining faster than the BoR key rate. In particular, since early 2017 the key rate has gone down by 1 pp to 9% p.a., while interest rates on long-term loans have dropped by 1.8 pp to approximately 10% p.a., and those on long-term deposits have declined by 1.2 pp to 8% p.a.

The monetary conditions and their evolution are at present serving to help a gradual recovery in consumer demand. The emerging transition from a saving to consumption-focused behaviour model is smooth. Admittedly, we have seen a decline in the savings ratio, including on the back of rebounding consumer lending.

In an economic upturn, this rise in consumption is a natural phenomenon. Retail sales are on the rise. Recent polls suggest households are willing to make big-budget purchases. We are also seeing a recovery in demand for durables. Nonetheless, to reconfirm yet again, what is important is that this process unfolds gradually and comes without an overheated economy and inflationary pressures it entails. No such trends are currently being detected. Consumer spending is expanding mainly on the back of mounting wages, not consumer credit. Overall wages in the economy has, in turn, been showing a balanced growth to date, consistent with a rise in labour productivity and without inflationary pressures.

Fourth, inflation declines as economic activity is on the rise. 

In the second quarter, GDP growth exceeded our expectations and those of many experts. The economy has continued to recover in the third quarter. Our estimates suggest that the equilibrium is almost reached in the economy and the labour market where unemployment has settled just above 5%. The results achieved in the second quarter allowed us to revise the 2017 baseline economic growth forecast to 1.7-2.2%.

However, our vision of the mid-term economic development and external environment has remained unchanged. We still believe that oil prices will fall in the first half of 2018 and hold at the average of $40 a barrel in real terms. GDP growth will stand within 2%. Given that the economy is close to the equilibrium, structural constraints should be removed to avoid an increase in inflationary pressure on the back of faster economic growth.

Now, a few words on the balance of payments.

Over a three-year horizon, current account balance will follow the downward path of oil prices. The balance will be only slightly positive in 2019-2020, certain quarters may even see it enter into negative territory. Having said that, the balance of payments should be estimated as a whole. Its items are closely connected, especially under the floating exchange rate. It would be wrong to forecast the exchange rate based on the performance of individual items only.

Under the floating exchange rate regime, the current account will be aligned with the balance of payments’ financial account balance, FX reserve movements factored in. Having said that, seasonal fluctuations are typical of the current account. It is usually higher in the first and the fourth quarters but lower in the second and the third ones. The financial account balance changes accordingly.

The balance of payments’ dynamics bear no considerable risks to the exchange rate neither in the short, nor in the medium term.

In conclusion I would like to dwell on inflation risks. Given that we have delivered on our aim of near 4% inflation, there are risks that it may not only exceed this reading, but also fall below it. By such risks we mean prerequisites for considerable and persistent inflation deviation from 4%. Some factors are currently pressing down on inflation. However, overall inflation risks are skewed upward and mid-term in nature.

Our estimates suggest that inflation’s downward deviation may be triggered by the above-mentioned food price movements. However, we believe it to be short-lived. Growing oil prices assumed in the alternative scenario may be another trigger.

Regarding proinflationary risk, we are staying focused on the high uncertainty of the external environment, its impact on inflation, exchange rate and inflation expectations.

Inflation may exceed 4% if consumption grows faster than production capacities can sustain.

Also, inflation risks may be posed by labour shortages. They can result in a lag between labour productivity growth and wage increase in certain sectors. This effect may be mitigated by foreign labour migration that restrains real wage movements. These processes are evident in construction, retail and agriculture. However, mid-term, cheap labour discourages the search for effective technologies. This may slow growth in labour productivity.

Given the balance of inflation risks, the Bank of Russia allows for a key rate cut within the next six months. We will ease monetary policy smoothly, keeping an eye on the state of the economy and inflation dynamics. Also, we will estimate the effect of the decisions we have already taken and the impact of market participants' forecasts for the key rate on monetary conditions. These currently meet our expectations.

Inflation has fallen to the target level, but in effect we are only taking up the task of ensuring price stability. Let me repeat that inflation has yet to be anchored near the target. We need to reduce and anchor inflation expectations and the enhance credibility of the central bank’s policy. In this context, our main focus will lie on proinflationary risks rather than the opposite factors.

As the 4% inflation becomes a regular benchmark for businesses, financial institutions and households, we will be able to complete this transition from the moderately tight to a neutral monetary policy. Our key principles and approaches to monetary policy for the next three years will be described in the Monetary Policy Guidelines we release today.

Q&A for the Media

QUESTION from Bloomberg:

Two questions, if I may, please. In your statement you mention that the Central Bank will make decisions, moving forward, based on its assessment of the risks of inflation substantially and persistently deviating from the target. Please explain in simple terms what the Central Bank understands by ‘substantially’? What does ‘persistently’ mean?

And question two. Although the Bank of Russia reduced its key rate by 50 basis points today, the tone of your statement is rather conservative. You mentioned that you will reduce the rate gradually. Does that mean that any further reduction will be within 25 basis points? Thank you.


Thank you very much. The assessment is ‘substantially’ and ‘persistently’. Let me say this again: We deliberately stop short of formalising these categories; rather, we will qualify them, explain them each time. The transparency of our communication policy cannot be overstated - we will be prepared to explain to the public and the media what we understand by ‘substantially’ and ‘persistently’. I have given examples. We mean inflation deviations that can lead to increased inflation expectations, for example. However, in the event that inflation expectations do not significantly rise and do not translate into a hike in inflation, we will still consider it insignificant even if it can be described as steady. I could offer a lot of examples.

Why are we avoiding setting a specific corridor and giving formal numerical values? Because it will tie our hands when we make appropriate monetary policy decisions, and it could distort the message we want to get across. This is the case if we were to set a corridor around 1.5%, plus or minus, as a lot of countries have. Assume inflation is temporarily outside the corridor, i.e., inflation has significantly risen or declined (by more than 2-3%). This does not mean a decision is due. Yet, the market would expect a decision from us in the wake of the corridor we have put in place. Our view is, this move would give rise to wrong expectations. Let me say once again: we will do our utmost to ensure our assessments are of high quality.

Importantly, this is not to say we will never explore a potential return to formalised principles and criteria. There is a long journey ahead. Let me reiterate: we have just started out so we will communicate these approaches so that their clarity and the clarity of our signals is a number one priority.

As for our further monetary policy. We can also speak about our principles here – we maintain that our approach should be ‘smooth’ and ‘gradual’. We believe this is the right approach. Undoubtedly, we can see that there is room for further loosening of the monetary policy; however, both the steps and pauses would entirely depend on how things unfold in in terms of inflation in the economy and, above all, on our forecasts as regards the sustainability of various inflation factors at play. Hence we are not ruling out pauses or 0.25-0.5 percent point reductions.


Ms. Nabiullina, on many occasions you claimed that that the real interest rate should total 3% - somewhere around 2.5-2.75. In light of today's decision, the actual interest rate is over 5%. Can you please specify the time horizon over which it might decline to 2.75%, the figure you stated.

And question two is about a mortgage boom. A lot of economists and bankers expect a mortgage boom to occur in the domestic market before the end of this year. This may be further supported by the Bank of Russia's decision today. What do you think the chances are of these predictions to materialise? When does the regulator expect a mortgage boom?

Thank you.


Thank you for your question. We confirm and maintain our estimates. We put the equilibrium interest rate in real terms at 2.5–3% and 6.5–7% in nominal terms. Our rate will remain above a neutral level while we rate inflation expectations as overestimated against our target and, ultimately, as long as they are unanchored. As inflation expectations recede and become anchored, that is, less responsive to temporary factors, we will be able to switch to neutral rates.

As other countries’ experience shows, the length of this process varies. We expect it will take two to three years, so we are shooting for 2019. Let me say once again: We cannot promise that our rates will approach neutral rates before the year end - we are just offering a forecast as to when we will deliver on this.

Regarding mortgage lending. I would hardly say we are seeing a kind of mortgage boom. Rather, we are seeing solid growth. Mortgage loans have indeed been on the rise, as data on the first seven months of the year suggest. There was a 12% rise in new mortgage loans, with a 7% growth in the average loan amount. This is really good growth - however, it's no boom. Plus, interest rates are declining. We expect this decline to continue, driven in part by today’s decision. This is set to sustain high demand for mortgage loans Our outlook for the mortgage segment is fairly upbeat. We anticipate solid growth in the segment; plus, the quality of loans has so far remained good, and it gives no reason for concern.

QUESTION from TASS Agency:

Would you say the Bank of Russia see grounds for a review of its inflation forecast for the end of the year?

And question two. A rating release from Standard & Poor’s is due today. What are your expectations?

Thank you.


We have also updated our year-end inflation forecast. We project inflation to stay within the 3.5–3.8% range. Once again, our view is, these estimates match our target.

And, regarding the expectations. We have always been upbeat as to rating agencies’ decisions. In fact, I believe that whole batch of positive macroeconomic data reveal the current stability, the progress to date, monetary stability, and steady budget conditions alongside optimistic paces of economic growth. Overall, there is a wealth of fairly positive data suggesting the progress we have made in terms of economic development.

Kommersant daily's QUESTION:

Today’s press release mentions, for the first time in several months, beyond labour market constraints on GDP, constrains related to production capacities. Which sectors are struggling to overcome such constrains, where are these risks?


Many thanks for your question. We still believe that that there are not a lot of free production capacities to fuel solid growth; hence the need for investment and structural change in the economy. We note that certain constraints in production capacities have the potential to check outputs and add volatility to inflation. These are mainly found in the transport industry and logistics in the agricultural sector and beyond. These constraints are most pronounced here; admittedly, transport constraints have an impact on a great number of industries.

Would you like to contribute something, Mr Dmitriev? Please, go ahead.


We have data from a survey of companies. They show that the construction and manufacturing industries are both way ahead in terms of negative outlook working at about 70% capacity

QUESTION from Reuters:

Compared to the previous press release, the list of inflation risks in today’s press release mentions no ruble fluctuations connected with geopolitical risks. Does this suggest that you no longer view the geopolitical risk as a threat?

And question two. The press release issued today does not mention a tax manoeuvre. How do you think fiscal policy will weigh on monetary policy through to the end of the year? When do you plan the next BoR bond issue?


Our risk estimates are indeed updated: some of them gain in prominence, some become less relevant - this is not to say that these risks have disappeared altogether. We are just singling out key risks. We are now starting to identify the risks presented by both directions in inflation movement, both up and down against the target.

The geopolitical risks are here to stay, and they are always factored in. They mainly translate into the performance of commodity prices. Geopolitical risks usually materialise in the Russian economy due to global financial markets, with their volatility, their fluctuations, and due to oil prices. These are two key transmission channels for geopolitical risks.

Regarding oil, you can see that as we make our forecasts, we take into account a variety of factors including those weighing on oil prices.

Regarding the potential impact of geopolitical events on financial markets, we note that global financial markets have largely adjusted to these risks. We further note that global financial markets are displaying a more muted reaction to geopolitics and various external events. We do take this into account; however, we do not single out any particular factors with the potential to materialise and have an impact any time soon.

Indeed, the tax manoeuvre is no longer mentioned. We looked into this in greater detail in the course of our key risk discussion. This is because the issue is not really on the agenda, that is, not so high on the Government’ agenda. We accept that some tax changes may be on the table. In this respect, we make our position clear in all communications with the Government, that any decision should be preceded by discussion and made known in advance so we can factor it into our monetary policy.

This sort of certainty in tax policies is important to businesses, based on the feedback we are hearing. It is no less important for a predictable monetary policy so that we can get rid of any unwanted, as it were, swings.

Now a comment on how fiscal policy impacts on monetary policy. The current fiscal policy is balanced enough and comes without inflationary pressures. Without a doubt, there are some factors related to tax or budget spending that we take into account when drawing up our forecasts - yet, we note the absence of inflationary pressures from these factors.

On the subject of Bank of Russia bonds. Indeed, we are planning on a new BoR bond issue. It is due this November. The volume is likely to be similar to or slightly above that of the previous issue.

QUESTION from Vedomosti:

Mrs Nabiullina, my question is about the Economic Development Ministry’s forecast. They expect substantial growth in 2018 and they price it in their estimates for wage growth in both real and nominal terms. How much of a grave inflation risk could this be? If so, does the Bank of Russia take this into account?

And a question on inflation risks. The BoR press release states that food price fluctuations are poised to have substantial inflation implications in the coming six months. How much of this impact do you think will continue into the next year?


Thank you. First, real wage growth and wage indexation are natural in a growing economy. We factor in these drivers: both wage indexation and minimum wage increase. As it stands, there is no substantial inflation risk. The wage index decision and the minimum wage increase are aggregately estimated to add 0.3 pp to inflation, which is not much.

On the subject of food prices. They are indeed a key component of the consumer basket, a large and volatile one. We forecast this volatility to continue until all seasonality-related problems are solved. This is impossible without investment. We know that the Government is currently looking to increase investment into processing, transportation and storage facilities. These efforts are indispensable from the viewpoint of the need to reduce volatility and inflation risks. And, once we have seen less volatile food inflation and inflation expectations, we can move more rapidly towards a neutral key rate.

QUESTION from Interfax:

I have several questions. Have you updated your oil price forecast for 2017 and the medium term? Have you adjusted the forecast for banking sector profits considering that in the first eight months these totalled almost one trillion rubles?

And my second question is on the urgent liquidity provision scheme, a liquidity support tool for banks. We heard BoR officials say that funds to support banks within this framework had been allocated before the BoR Board decision to include this tool in its line of refinancing instruments. Can you please enlarge on the amount of funding provided through this channel? Do you intend to disclose such information, given that even unsecured loan data appeared on the BoR website?


Thank you.

Our current forecast for the price of oil in 2017 is 50 dollars a barrel. As I see it, this is unchanged from our previous projection. The GDP forecast upgrade is first and foremost driven by Q2 outcomes, that is, the upward revision comes as a result of the actual data exceeding our estimates - rather than as a result of higher oil prices.

However, the mid-term outlook is virtually unchanged. We also think that in the event the OPEC deal is not extended, the oil price may go down somewhat and may well reach 40 dollars a barrel, in real terms, before the end of the year.

As for banks’ profits, we have not provided any numerical estimates for the whole of 2017. Yet, profits are set to exceed last year’s figures. This can be clearly seen from the current dynamics, with profits rising upwards of one trillion.

On the urgent liquidity provision scheme, the decision to provide liquidity to Otkritie was made before the decision on the urgent liquidity provision scheme. However the former was consistent with the pending introduction of the liquidity scheme, first, and, second, it was within the Bank of Russia’s mandate. Yes, data will be disclosed in the routine manner. This is in line with our prior communications. No changes will be made to the disclosure procedure. Otkritie is disclosing these data, so they will be available to the public.

QUESTION from Interfax:

Do you intend to disclose information on the urgent liquidity provision scheme, as you do on other refinancing instruments?


Well, unlike repo and other schemes, this is not a standard refinancing instrument. To the best of my knowledge, we only disclose data on repo, loans extended under BoR regulation 312 etc. - I will come back to this question. We will look into the procedure for disclosing this information. Importantly, the urgent liquidity provision scheme is intended for banks facing temporary difficulties. This information is sensitive for a financially stable bank that we can see working to restore financial soundness. The fact that the bank has made use of this tool is certainly sensitive information so it should only be made publically available in very limited cases. I fully support the idea of such disclosure in principle - it is a matter of at what point in time it is disclosed. It should not occur at the time when a bank is successfully dealing with its liquidity issues, as it stands to reason that such disclosure may well provoke a bank run, a run on a financially stable bank. Liquidity problems may be the result of multiple factors Including information attacks and similar events.

Hence the need to revisit the issue of information disclosure under the urgent liquidity provision scheme. Moving forward, we will certainly tell you about disclosure principles; at this point in time, however, we believe it is just not right to disclose this information the day after liquidity was provided.

QUESTION from Bloomberg:

Mrs Nabiullina, a lot of economists note a gap between retail data and consumer confidence, and attribute this to significantly expanded online retail. Do you see this expansion, and does it bring downside risks for inflation?


It is true that there is a certain discrepancy between the growing retail index and the current income trends and consumer confidence. We are aware of these indicators, and we are trying to understand what is behind this discrepancy. As we see it, e-commerce obviously has some kind of impact, given that its share is growing. Moving forward, we will look into how we take this into account. We admit that the problem exists. Yet it's not of a scale that can change the qualitative assessments of economic trends.

QUESTION from Vedomosti:

Mrs Nabiullina, the banking community is coming up with suggestions that the [BoR key] rate should be reduced to a 6.5–7% level. Do you think this is possible with the current rate of inflation around 4 per cent or slightly less than 4 percent? Or [is it only possible] when inflation has declined further?

And one more question, please. On the subject of the inflation risks we are discussing. How large do you think the risks of deflation are? Is there a level of prices, or certain conditions that would lead to the Bank of Russia reversing its policy and stimulating price growth?

Thank you.


Yes, we can see that the [BoR] key rate may be 6.5–7% with 4% inflation, yet this is only possible once inflation expectations have declined and become anchored. Our projections suggest this is likely to happen over a two to three year horizon.

We see no deflation risks in the future because we have no deflation. A monthly decline in prices is not deflation. Deflation is normally understood as annualised price decline. We are seeing no such thing and thus project no deflation risks for the next few years at least.

Potential reverse policies to spur inflation would be enacted should inflation fall persistently and substantially below 4%. This is when such policies would be on the table. This is not the case at this juncture.

QUESTION from Bloomberg:

As long as we have mentioned the bank Otkritie, we would like to ask you this question. This week, the Finance Ministry made an offer to bond-2030 holders. Did you discuss the terms of the offer with the Bank of Russia? And, considering the offer only lasts one week, does the Bank of Russia, in its capacity as the bank's interim administrator, plan for bond-2030 exchange?

Thank you.


In this case, we will not disclose our plans, that is, we will not say if we are participating or not.

Kommersant's QUESTION:

It would probably be a reasonable question to ask which specifications for inflation expectations you apply to establish if inflation is anchored or not. What do you measure: do you measure the volatility of monthly polls or something else?


This is a very good question. It is not so much the level of inflation expectations that is essential to us. It is their stability against a number of factors that matters more.

Let me explain. Inflation expectations are unlikely to reach 4% in the near future. In many countries that successfully target inflation, inflation expectations tend to be higher. This is because people tend to perceive that inflation is higher than its real readings are. [Inflation] expectations are now very high at 9.5%. These are very high inflation expectations, too high against the target. What matters most, very high inflation expectations tend to be very sensitive, too. They can be very sensitive to one-off factors. For example, a poor harvest [as we pointed out] or a short spike in food prices. Yet, when people understand that such trends are only temporary and that prices are sure to get back to 4%, and that the Central Bank will do everything possible to prevent them returning to above 4%, then inflation expectations remain steady without any spikes. There may be some slight fluctuations but no substantial increase. There is currently no such substantial decrease and we can see inflation expectations responding relatively quickly to both food prices and the exchange rate. We are certainly keeping a close eye on such fluctuations. It is only when these fluctuations decline or disappear entirely that we will be able to say that they have been anchored.


I have two further technical questions. Can you please tell us if your vote on today's key rate decision was unanimous? Thank you.


This time I will tell you how we voted. We voted unanimously. However, I would like to make the following statement. In future, we are unlikely to reveal the results of our vote or individual Board members’ opinions. This is because we have decided to adhere to a single vote policy. Our position is, while inflation expectations have yet to be anchored, it would be too early to reveal each individual member’s opinion on the matter. We will switch to this at some point in the future - yet it is premature at this point in time.

Regarding the recent strengthening of the ruble, we also took this factor into account, we considered the performance of the exchange rate because it was mixed. We saw the ruble growing stronger alongside weakening factors- there was an overlap of these two factors. Certainly, we took this into account.

QUESTION from the Financial Times:

As we were speaking about Otkritie, I...


This press conference is dedicated to monetary policy. [Please keep to the subject]: if you have questions about monetary policy, I am ready to take them. Welcome.

QUESTION from Reuters:

I would like you to elaborate on the ruble exchange rate and its impact on inflation this year. Which current account deficit do you expect for the third quarter? Do you think this could entail a weaker ruble? Thank you.


Let me say again: the performance of the current account in and of itself is not a driver for exchange rate movement, either up or down. In a floating exchange rate regime with current account deficit, weakening in the exchange rate is impossible. Conversely, the exchange rate can strengthen on the back of the state of financial account with currency reserve movements priced in. This is why we will not come to any conclusions based on current account movements - we see no substantial risks to the foreign exchange rate that would trigger its substantial instability.

What will the current account status be in the third quarter? It is indeed weak, and its weakness is seasonally driven. It could be weakly positive around zero, or it could be weakly negative. From a key economic data perspective, we see no risks of any kind. Thank you.