Talking points for press conference of Alexey Zabotkin, Deputy Governor of the Bank of Russia, on draft Monetary Policy Guidelines for 2023–2025

Good afternoon.

This year saw drastic changes in the conditions the Russian economy operates in. We are publishing our annual strategic document — Monetary Policy Guidelines — in August, which is earlier than usual, in order to present more comprehensively to the public and businesses our forecast of the Russian economic development and monetary policy the Bank of Russia intends to implement in different scenarios. We believe it would give more specific guidance for businesses and households to make economic decisions. 

This year, our country faced the sanctions against its real and financial sectors that were unprecedented in scale. In February and March, these events caused a higher volatility in the financial market, a weaker ruble, a sharp rise in inflation expectations, an outflow of depositors’ funds from banks, and a feverish consumer demand.  Financial stability risks rose substantially.

A package of measures was taken to stabilise the situation. They included a brief but sharp increase by the Bank of Russia of the key rate on 28 February, an introduction of restrictions on capital flows, a suspension of trades on the Moscow Exchange, regulatory easing for banks, and a borrower support. These measures made it possible to curb the volatility in the domestic financial market, return depositors’ funds to banks, and support the banking sector.

The Bank of Russia managed to fully meet the elevated liquidity needs of banks and stabilise the situation quickly even though fluctuations in cash flows were extreme. The major contributors were the resilience of the banking system, which had been continuously improved in the last few years, as well as the maturity and reliability of the monetary policy operational procedure, which supported liquidity provision and absorption mechanisms.

The financial situation stabilised. Now, the economy is undergoing transformation. This is a long and challenging stage of the adaptation to new environment. It will take time for companies to readjust their business models and economic relations and for people to revise their consumption habits. Our key task is to ensure that our country goes through the transformation without extreme losses in the economic activity and avoids macroeconomic stability risks. 

Now, I will speak about monetary policy principles and goals. The monetary policy goals and principles remain unchanged though the situation has changed dramatically. The Bank of Russia maintains its commitment to ensuring the price stability based on the inflation targeting strategy.

Consistently low inflation is an essential prerequisite for the balanced growth of the economy in any environment, including the current conditions. Our inflation target is annual inflation close to 4% on a permanent basis.

I would like to note that an important feature of this strategy is its flexibility. We choose such a path for bringing inflation back to the target that will make it possible to reduce the deviation of output from its potential. This is the main contribution monetary policy makes to the stability and predictability of the economic environment required for the transformation and development of the Russian economy.

Prices for a wide range of goods and services will be adjusting to the new environment over the current and next year. Inflation will be temporarily above the target. Normally, it would take from 12 to 18 months to bring inflation back to target. However, now it appears necessary to do it more gradually given the scale of changes in the economy.  According to the Bank of Russia’s forecast, inflation will return to 4% in 2024.

We will continue to impact the economy and price movements via interest rates while implementing monetary policy. The key rate and communication remain the main tools of monetary policy. Sanctions pressure and implemented protective measures temporarily complicated the transmission of our decisions to the economy. The transmission of the key rate signal via individual channels became less effective. However, its effectiveness is recovering as the economy gets adjusted to the imposed restrictions.

I would like to remind you that our key rate decisions impact other interest rates, credit activity, propensity to save, and aggregate demand with substantial lags. This is why monetary policy decisions are based not only on the comprehensive assessment of the current economic condition but also on the medium-term macroeconomic forecast. We updated the set of models the Bank of Russia’s forecast is based on in order to factor in the effect of the emerged capital flow restrictions on the monetary policy transmission mechanism.

I would like to stress once again that we maintain the floating exchange rate regime for the ruble. The Bank of Russia does not set any restrictions or benchmarks for the ruble exchange rate or the pace of its movements. Floating exchange rate is an important factor for implementing an independent monetary policy. It enables the economy to adapt to changes in the external environment in an efficient manner.

Capital flow restrictions are a financial stability tool. They are to curb an excessive volatility of the foreign exchange market at times of extreme external shocks. Earlier, foreign exchange interventions were used to address this task. However, it is impossible to use them now for this purpose as Bank of Russia accounts denominated in the currencies of 'unfriendly' countries are frozen.

The efficiency of monetary policy depends on the confidence in it of households, businesses, and market participants. It is impossible to gain and retain such confidence without information transparency. We still seek to disclose information explaining our monetary policy decisions as quickly and comprehensively as possible.

Let’s return to the situation in the economy. The second part of the Guidelines sums up key developments since autumn 2021 to date and our actions. I will not describe them in detail now but would like to note briefly that following a sharp rise in prices in March—April, inflationary pressure have been declining rapidly. This was in part assisted by the propensity to save which increased in response to a dramatic rise in deposit rates following the key rate hike. The strengthening of the ruble exchange rate in May—June was an important factor.

The fast decline in the current pace of price growth as well as in inflation expectations helped us return the key rate to the levels of the beginning of the year just as quickly. The Bank of Russia responded promptly to incoming information, including taking key rate decisions at extraordinary meetings. At present, the key rate is 8% per annum, which is the minimum since mid-December last year. Other interest rates, including deposit rates, bond yields, and lending rates, are following the downward path of the key rate at varying speeds.

The uncertainty of further developments remains extremely high. It is connected both with the internal processes of economic adjustments and with external factors. As I have mentioned, domestic conditions mean the speed and scale of businesses’ adaptation to changes and developments in consumer behaviour. External conditions mean the geopolitical environment, the situation in the global economy, inflation and monetary policies in other countries. To illustrate the effect of various combinations of these drivers on the economy and our monetary policy, in addition to the baseline forecast, we present two alternative scenarios in this year’s Guidelines. They are called the Fast Adaptation and the Global Crisis.

Our baseline scenario for 2022–2024 was published in follow-up to the July key rate meeting of the Board of Directors. As usual, in the Guidelines we expand the forecast horizon by another year, extending it to 2025. The baseline scenario assumes that the restrictions already imposed on the Russian economy will remain unchanged over the entire forecast horizon. The global economy will continue to evolve in line with previous trends. In response to accelerating inflation, major central banks will raise their rates. This will lead to a slowdown in global economic growth in 2023. In this situation, monetary policy in the largest economies will be sufficiently cautious to avoid a massive recession and acute crises.

The bottom of GDP decline will be passed in the first six months of 2023. To a large extent, this decline is associated with a reduction in potential output. The economy will be moving towards a new long-term equilibrium. More details on the economy’s equilibrium and deviations from it are presented in Box 6 of today’s document. As the economy transforms, its growth will resume. GDP growth will be 1.0–2.5% in 2023 Q4 on 2022 Q4 (although there will be a decline in 2023 as a whole due to the high base of the first six months).

The long-term growth rate of the economy will be shaped by improved labour skills and the higher efficiency of capital consumption, the availability of modern technology and equipment, and the investment climate.

Monetary policy will aim to return inflation to the target, given the necessary scale of the adjustment of relative prices. We estimate that inflation will be at 12.0–15.0% in 2022, declining to 5.0–7.0% in 2023 and returning to 4% in 2024.

I would like to note that the level of interest rates for households and businesses will still be conditional on low inflation and long-term fiscal resilience.

Given the announced projected inflation path, the annual key rate will average 6.5–8.5% p.a. in 2023 and 6.0–7.0% in 2024. Notably, in 2025, it will correspond to our estimate of the long-term nominal neutral rate of 5.0–6.0% p.a.

Please note that there are factors that can influence the neutral rate estimate both upwards and downwards. The most significant of them are listed in Box 2 of the Guidelines. We will assess the cumulative impact of factors on our estimate of the neutral rate in line with incoming data.

The alternative scenario Fast Adaptation assumes a quicker structural transformation of the economy. This transformation will be primarily driven by better import dynamics than forecast in the baseline scenario. This scenario implies that businesses will be able to build new economic linkages faster. The mechanism of parallel imports will additionally support the availability of necessary goods and equipment. The quantities and value of exports will be also higher than in the baseline scenario.

Hence, the recovery growth of the Russian economy in 2023 will start earlier and will be markedly more active, with GDP growth assumed to be at 3.5–5.0% in 2023 Q4 on 2022 Q4. A faster easing of supply-side restrictions, in particular, higher import availability, coupled with monetary policy pursued, will help annual inflation return to a level close to the target as early as by the end of 2023. The key rate will also decline faster. Already in 2024, the average key rate will return to the neutral range of 5.0–6.0%.

The second alternative scenario presented in the Monetary Policy Guidelines is the Global Crisis scenario. It assumes a significant and sharp deterioration in both the global economic trends and geopolitical environment. Persistently high inflation in major countries might require their central banks to tighten their monetary policies more quickly and considerably. This will entail a recession in the largest economies. As for emerging market economies, especially those that have accumulated large amounts of external debt, they may face higher financial stability risks. The contraction of global economic activity in this scenario may be exacerbated by geopolitical developments, specifically, by new sanctions against Russia. The combination of these events will intensify imbalances in the world economy and may lead to a new global financial and economic crisis comparable in scale with the 2007–2008 crisis.

For Russia, such a global crisis would cause a decrease in external demand, export prices and quantities. New sanctions would make imports less available. This will considerably complicate the structural transformation of the Russian economy and its adaptation to the new conditions. In 2023, GDP will contract more than in 2022. Over 2024, GDP will stabilise at a low level. Recovery growth will begin no sooner than in 2025. The economy will face another strong proinflationary shock, which may be more persistent due to a more considerable ‘unanchoring’ of inflation expectations. In this case, inflation will return to the 4% target only in 2025. This will require tighter monetary policy compared to the baseline scenario. A return to the neutral range of the key rate will occur beyond the forecast horizon.

I would like to touch upon the fiscal policy. It will markedly influence the path of the economy in all scenarios. Following the 2022 suspension of the fiscal rule, the situation in global commodity markets began to make a stronger impact on the economy in general and the foreign exchange market, in particular. Among other things, this caused a higher volatility of the ruble exchange rate. Now, the Government is working on new parameters of the fiscal rule. These parameters will determine the scale of its countercyclical impact as well as the level of the structural balance of the budget system. We will take both into account when revising the forecast and making further decisions.

The Russian economy has repeatedly demonstrated the ability to adapt to changing conditions. We will support this process, while maintaining macroeconomic sustainability. I would like to stress once again that, under all scenarios, the Bank of Russia’s monetary policy will aim to ensure price stability and the return of inflation to the ‘close to 4%’ target.