Press conference of Bank of Russia Deputy Governor Alexey Zabotkin on draft Monetary Policy Guidelines for 2024–2026

Today, we have released the first draft of the Monetary Policy Guidelines for 2024–2026, our strategic document on monetary policy.

The document takes into account the results of the Monetary Policy Review. I would like to remind you that we started economic studies in 2021 in order to assess the efficiency of our monetary policy and find out how well its effective parameters conform to the changing economic environment. We completed these studies this year. We published the findings in May and discussed them with representatives of the expert community, businesses, public organisations, and government authorities. The public consultations held all over the country, from Kaliningrad to Chukotka, were very helpful when we were summing up the results of the Review and preparing the Guidelines.

As usual, I would like to start out with the goals and principles of monetary policy. They remain unchanged: as before, our policy is aimed at ensuring price stability, namely, steadily low inflation. Implementing its monetary policy, the Bank of Russia pursues the inflation targeting strategy. Our studies prove that this strategy helps not only support low inflation in quiet times, but also respond to shocks arising in crisis periods. As a result, this promotes necessary conditions for balanced growth and long-term development of the country’s economy.

The goal of our monetary policy remains unchanged, that is, to ensure annual inflation of close to 4%. This inflation target is effective on a permanent basis.

The results of the studies prove that the inflation target of 4% chosen in 2015 was reasonable. Besides, by the end of 2021, the Russian economy had formed prerequisites for reducing the inflation target. However, given the dramatic alterations in the economic environment in 2022, the Bank of Russia should consider this issue more cautiously. After inflation stabilises close to 4% and the overall economic uncertainty decreases, we will return to this issue and assess the reasonableness and possible time of a decrease in the inflation target. When and if this decision is made, we will announce it in advance so that both people and businesses could have enough time to adjust to a new level of the target and take it into account in their economic planning.

Pursuing price stability, we are influencing the economy and price movements primarily through interest rates. As before, the key rate and communication are the main instruments of our monetary policy. However, monetary policy decisions influence the economy and price dynamics through a long chain of interconnections known as the monetary policy transmission mechanism. Besides, the effect of the key rate on a number of variables, specifically the ruble exchange rate, has transformed. Today, the effect of the key rate on it has become more indirect. Until 2022, when there were no restrictions on cross-border capital flows, key rate decisions translated into the ruble exchange rate directly through prices for financial instruments and the flows on the financial account. Now, a change in the key rate to a greater extent influences domestic demand and, then, the demand for imports and the ruble exchange rate. The influence through the channel related to capital flows remains, but has become weaker than before 2022.

We continue to pursue the floating exchange rate regime. It enables the economy to efficiently adjust to changes in the external environment and the Bank of Russia — to implement independent monetary policy.

In addition, in 2023, the Bank of Russia resumed fiscal rule-based operations in the domestic foreign exchange market. Sometimes, when volatility in financial markets increases, we make decisions to suspend such operations. In particular, we made the decisions to temporarily suspend fiscal-rule based foreign currency purchases in 2018 and 2020. As you know, we made a similar decision this week. From 10 August through 31 December 2023, the Bank of Russia will not buy foreign currency in the domestic market to mirror the operations that are still conducted by the Ministry of Finance using extra oil and gas revenues. The suspended purchases might be made during 2024 and further on after fiscal rule-based regular purchases are resumed, in the same way as we made the purchases suspended in 2018 throughout 2019. Therefore, this decision does not change the fiscal rule mechanism in any way, but reschedules the Bank of Russia’s operations in the domestic foreign exchange market.

Returning to the content of the Guidelines, as before, making our monetary policy decisions, we rely on the comprehensive analysis of the current situation and the macroeconomic forecast. We are continuously enhancing our model-based approaches and, this year, introduced two new adjustments into the main projection model. First, we incorporated the indicator of core inflation into the structure of the model, which helps more precisely determine the trend component of inflation inside the model and to differentiate it from short-term price fluctuations. Second, we added the block covering the labour market. These adjustments improve the understanding of the main interconnections in the economy and enrich the analysis.

Finally, a key principle of our policy is information transparency. Confidence of people, businesses, market participants in our monetary policy is crucial for its efficiency. Therefore, the Bank of Russia seeks to promptly and amply communicate the information on the decisions made and on our assessment of the economic situation. According to the results of the Review, our monetary policy has become much more transparent in recent years. We will continue to enhance our communication, considering the suggestions received in the course of the public consultations. Specifically, we will increase the number of published macroeconomic forecast indicators, publish the codes of forecast models, and continue to develop the practice of multi-layered communication when one and the same material is prepared with different degrees of detail so as to target various audiences. Besides, we will start to disclose the details of the discussion of our key rate decisions. We are going to begin implementing these initiatives in the first half of 2024. We will provide more details about the formats and time later on.

Now, I would like to speak on the situation in the economy and our forecast. The economy has been adapting to the new conditions faster than assumed in last year’s baseline scenario of the Guidelines. By the middle of 2023, output in the key industries bounced back to the pre-crisis level. Companies are finding new suppliers and sales markets and rearranging their logistics and settlements. Businesses are developing production facilities focused on the domestic market and substituting imports. However, the situation in the labour market is getting more complicated. Staff shortages are becoming more acute, while unemployment is at its record low, dropping to new lows every month. This is a considerable constraint on a further expansion of output. Besides, domestic demand is growing. Consumer sentiment is improving. Lending is increasing more quickly. High aggregate demand amid supply-side constraints is exacerbating price pressure. Moreover, the rise in domestic demand also contributes to an increase in the demand for imports. Coupled with the restrictions on exports, this expansion causes a weakening of the ruble which is also pushing up prices. Consequently, in recent months, we have been observing a notable rise in current inflation, including for its stable components. Households’ and businesses’ elevated and unanchored inflation expectations remain a material source of proinflationary risks.

Further developments in the Russian economy will depend on a number of internal and external conditions. On the one hand, a lot will depend on how efficiently the Russian economy will continue to adapt to the enacted external restrictions. On the other hand, a critical factor is the situation in the world economy, inflation dynamics and monetary policies in the largest economies, as well as geopolitical developments. Depending on the combination of these key conditions, we consider possible developments in the baseline and two alternative scenarios.

We have already published our baseline scenario following the Board of Directors’ key rate meeting in July. This scenario assumes that the world economy continues to develop within the already existing trends. Seeking to return inflation to the target, the central banks of advanced economies will pursue tight monetary policies for a long time. This will slow down the growth of the world economy, which will limit price growth in most commodity markets. The sanctions enacted against the Russian economy will remain over the entire forecast horizon. Among other things, this means that Russian export goods will still be sold in the global market at a certain discount to global prices.

In 2024–2025, the transformation of the Russian economy will progress further, but its growth rates will be more moderate than in 2023. This will be predominantly associated with the completion of the recovery that we have been observing in 2023. In 2026, the Russian economy will return to a balanced growth rate of 1.5–2.5%.

Given the monetary policy pursued, inflation will decrease to the target at the end of 2024 and stay close to 4% further on. In order to bring inflation back to the target in 2024, we made the decision to raise the key rate to 8.5% per annum in July and admit the possibility of its further increase at next meetings. In the baseline scenario, we forecast that the average key rate will be in the range of 7.9–8.3% per annum in 2023 (which implies 8.5–9.3% per annum for the remainder of the year), 8.5–9.5% per annum in 2024, and 6.5–8.5% per annum in 2025. As inflation stabilises at the target and fiscal policy normalises in 2026, the key rate will stabilise within its long-term neutral range. Today, we estimate this range as 5.5–6.5% per annum, which is 0.5 pp higher than a year earlier. As we explained earlier following the July meeting, the estimate of the longer-run neutral interest rate was raised due to the changes in the estimates of potential growth rates of the Russian economy, the global neutral interest rate and the country risk premium.

In addition to the baseline scenario, we developed two alternative scenarios. The Stronger Fragmentation scenario assumes that the world economy will become more fragmented, with increasingly more countries dividing into blocks. This process began in 2018–2019 and, last year, was exacerbated by intensifying geopolitical tensions. The pressure of the sanctions on the Russian economy might become more severe under this scenario. The division into regional blocks will have an adverse effect on global trade, hampering the growth of the world economy, and might provoke a decline in prices in global commodity markets. Consequently, the Russian economy might face a decrease in the demand for its exports and export revenues. As a result, the growth rates of the Russian economy in 2024–2025 will be lower than those predicted in the baseline scenario.

The shrinkage of imports due to stronger sanction pressure, coupled with domestic production constraints associated with a shortage of imported components, will exacerbate the gap between demand and supply, pushing up prices. In the case of this alternative scenario, inflation will speed up again in 2024 to 5.0–7.0%. To bring inflation back to the target, the Bank of Russia will have to pursue tighter monetary policy in 2024–2025 compared to the baseline scenario. Inflation will return to 4% in 2025, that is, a year later than in the baseline scenario.

The Risk scenario assumes that inflation pressure in advanced countries will persist, which might force the central banks tighten their monetary policies even more than under the baseline scenario. Moreover, rapid increases in their policy rates might worsen the situation for financial institutions in the largest economies. Materialisation of interest rate risk in the financial market might augment the uncertainty and lead to an extensive withdrawal from risky assets. As a result, this might entail a global financial crisis, the scale of which might be comparable with the 2007–2008 crisis. Deglobalisation in this scenario will magnify the negative effects of this financial crisis. The sanction pressure on the Russian economy might intensify. If the largest economies face a recession, global demand will contract of course. Oil prices will plummet. Consequently, output in the Russian economy will be shrinking for two years. The economy will start to recover as late as 2026, growing by 2.0–3.0%, and return to a balanced growth path beyond the forecast period.

In the case of the Risk scenario, inflation will speed up to 11–13% in 2024 due to more severe supply shocks and a weaker ruble. To prevent inflation from spiralling out of control, the Bank of Russia will have to notably tighten monetary policy in 2024 and pursue tighter monetary policy in 2025, compared to the baseline scenario. Given the monetary policy pursued, inflation will return to the target in 2025.

An important factor that will influence the economy under any of the scenarios is fiscal policy. When preparing the forecast and making its monetary policy decisions, the Bank of Russia takes into account the planned fiscal policy measures. Alongside price stability, a key factor for maintaining macroeconomic stability is a responsible and well-balanced fiscal policy relying on the fiscal rule. If the budget deficit exceeds the targets, this expansion might provoke additional proinflationary pressure. In this case, the Bank of Russia might need tighter monetary policy to ensure price stability.

Winding up, I would like to emphasise once again: whatever the scenario, the Bank of Russia will return inflation to the target. Of course, price stability is not the only prerequisite for economic development, but it is critical to ensure steady and balanced economic growth and promote necessary conditions for this growth.