Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 26 July 2024
Good afternoon,
Today, we have made the decision to raise the key rate to 18% per annum.
Earlier we specified four triggers for raising the key rate. All these factors have materialised. Firstly, underlying inflation has been rising. Secondly, there has been no cooling of consumer activity. Thirdly, the positive output gap in the economy has not been shrinking, while labour market tightness has been growing. Finally, new proinflationary risks associated with the sanctions have set in. All this means a significant deviation from the baseline scenario. Therefore, we have considerably revised our macroeconomic forecast. It now assumes that monetary policy should be tighter to bring inflation down to the target.
I would now dwell on the reasons behind our today’s decision.
Firstly, as regards inflation.
Price growth rates have been persistently high in recent months. Underlying inflation accelerated in 2024 Q2. The first weeks of July suggest that elevated inflationary pressures have been sticky, even if the indexation of the housing and utility rates is netted out.
Households’ inflation expectations have been rising for three consecutive months. Businesses’ price expectations remain elevated. Analysts’ expectations for the next year have started to deviate from the target.
The inflation forecast for this year has been revised upwards to
Secondly, the economy.
The GDP growth rates remained high in 2024 Q1 and Q2, while inflation was accelerating. This suggests that overheating in the economy has remained considerable. Labour force and production capacity reserves have been almost exhausted. Shortages of these resources might cause a situation where the economic growth will be slowing down despite any attempts to boost demand. Moreover, this boost will only further accelerate inflation. This is actually a scenario of stagflation that could only be stopped by way of a deep recession. Today’s additional tightening of our policy will help prevent such a scenario.
Being aware that labour shortages are becoming a major constraint on the expansion of output, companies are making considerable investment to increase labour productivity and automate and robotise production processes. However, firstly, it will take time for the investment to have the effect. Secondly, companies’ costs for equipment purchases have been increasingly rising due to generally high inflation and, additionally, due to sanctions. This is limiting businesses’ potential to enhance labour productivity and upgrade production equipment. Although the supply of goods and services will continue to expand even in such conditions, this process will not be as quick as the current demand growth. Moreover, high inflation and rising costs are forcing companies to constantly adjust their investment projects. Low inflation that our monetary policy is aimed at will enable businesses to implement their investment programmes more efficiently owing to more affordable funding and more moderate costs.
Taking into account the GDP statistics for 2024 H1, we have revised upwards our estimate of the economic growth for 2024 to
Thirdly, monetary conditions.
Over the past six months, the key rate was somewhat dampening the increase in credit, but its growth rate is still far from being balanced. What is the reason for this?
Firstly, the expansion of the demand for loans has significantly exceeded our estimates. Expecting the key rate to be cut already this year, as was assumed in our forecast, enterprises have continued to quickly increase variable rate borrowing. Consequently, the growth rate of variable rate loans has accounted for nearly 99% of the overall expansion of corporate lending from the beginning of the year. Moreover, borrowers have been ready to take out loans at higher interest rates because of growing inflation expectations, record-high profits, and aspirations to capture vacant promising market niches.
Secondly, the amount and structure of fiscal incentives have affected lending to a greater extent than we presumed earlier. Companies that signed state contracts have been willing to raise loans at elevated interest rates expecting payments from the budget. And, of course, another important factor has been subsidised mortgage lending programmes. These changes in budget expenditures have entailed a strong credit impulse.
Thirdly, consumer lending has been growing faster amid the rise in incomes of a considerable proportion of households, enabling people to both spend and save more.
Thus, the expansion of lending has surpassed our forecast, while the level of the key rate in such a situation has turned out to be insufficient to return lending to more balanced growth rates.
Subsidised mortgage applications peaked in June. Expecting the termination of the subsidised programme, borrowers were making a last-ditch effort to raise loans at lower rates. The demand for mortgages contracted in July. However, the first two weeks of July actually brought a pause in transactions since the Government had not yet approved new family mortgage parameters. Therefore, the data with elevated growth rates in June and decreased growth rates of lending in July are not representative. We will only be able to draw more meaningful conclusions about steady mortgage lending dynamics after these temporary effects have been exhausted, that is, closer to the end of 2024 Q3.
The results of 2024 H1 have shown that we need a higher level of interest rates in the economy, including taking into account a higher estimate of the neutral rate. We have revised it upwards by 1.5 pp to
From our previous meeting, yields on federal government bonds and money market rates have soared for all maturities. The upward shift of the yield curve has already priced in all our signals regarding tighter monetary policy, including our today’s key rate decision. Tighter monetary conditions will help ensure a more balanced growth of credit and increase the propensity to save.
Now, I would like to speak of external conditions.
Our view of the world economy and the situation in commodity markets have remained nearly unchanged. In 2024 Q2, the value of exports stayed the same in annualised terms, while the dynamics of imports were subdued. The situation in imports is explained by both companies’ difficulties with cross-border settlements and the impact of tight monetary policy. According to high-frequency data, including from our regional divisions, businesses’ transaction costs have been rising. This might erase the effect of the earlier ruble strengthening on prices for imported goods.
Considering the actual data and the growth prospects of the world economy, we have updated the forecast of the balance of payments. Exports will be slightly higher, while imports will be somewhat lower over the entire forecast horizon. We have revised upwards the forecast of the current account surplus to $72 billion for 2024 and to $57 billion for 2025.
I would now dwell on the risks to the baseline forecast.
The ratio of risks is still shifted towards proinflationary ones. Firstly, this is the risk that the economy will remain overheated, which might be attributed to both persistently elevated demand and supply-side constraints. Inflation is its main indicator. Secondly, as regards inflation expectations. The more strongly high inflation becomes embedded in expectations, the harder and more painful it would be to return the economy to a low inflation rate. Thirdly, the risks related to external conditions are still there. Although Russian companies have been adapting to the sanctions, they are facing extra costs that are ultimately translating into price growth.
Disinflationary factors include a more considerable increase in the economy’s potential over recent years than assumed in the baseline scenario. Businesses have been making large investments to expand production capacities and enhance labour productivity. However, it is difficult so far to estimate how significantly these efforts will increase the economy’s potential.
Finally, we will continue to take into account the effect of fiscal policy on aggregate demand. If fiscal policy normalisation deviates from the adopted path, this will notably affect the level of the monetary policy tightness.
Winding up, I would like to comment on the future path of the key rate.
We will be keeping the key rate high for an extended period — for as long as needed to bring inflation back to the target and stabilise it at this level. If necessary, we admit the possibility of further increasing the key rate. This is reflected in our updated forecast where the key rate path for the next three years has been notably raised.
Thank you for your attention.
Q&A for the Media
QUESTION from TASS:
Colleagues, did you discuss today a more drastic increase in the key rate, and perhaps there were some arguments to keep it unchanged?
ELVIRA NABIULLINA:
The absolute majority of discussion participants supported the move to increase the rate to 18%. Yet there were also proposals to keep the current level of 16%. The thinking was that given the lags of monetary conditions it would take longer for the tight monetary conditions to reduce inflation and return it to target in a 16% rate setting.
Some participants also proposed raising the rate to 19% and 20%, that is to a level where we most likely approach the completion of the rate increase cycle.
The ultimate decision was to raise the key rate to 18%. However, as I have said, a further increase is not ruled out, and our next steps depend on incoming data.
QUESTION from Interfax:
13 August marks the expiry of OFAC’s licence to wind down transactions involving the Moscow Exchange Group. Do you think there are now rising risks of exchange trading in the yuan in Russia ceasing? What future trends in imports do you think are likely? How severe is the settlements problem, including in the yuan, and is there a quick solution?
Now, another question, please. Does the Central Bank support the lifting of the ban on collection and seizure of funds in Type C accounts, in conjunction with cases of damages to the Russian Federation and the Central Bank? Could you give a sense of how much there is Type C accounts: one or several trillion?
ELVIRA NABIULLINA:
As regards the risks associated with cross-border settlements, the risks of secondary sanctions have indeed grown. This is evident from the challenging payments situation. Businesses are working hard to secure settlements. But I have no further comment.
While the payments situation is doubtless having an impact on imports, we believe that another impactful factor is tightening monetary conditions. It is difficult to tell one from the other, but both factors most likely exert their influence.
While on Type C accounts, I have mentioned on several occasions that we leave undisclosed the amount of assets sitting there.
As for the response, as I have said, it is up to our senior leaders to decide.
QUESTION from Lipetskaya Gazeta:
Did today’s Board meeting consider the option of shock therapy, that is an immediate rate increase of five to seven points? Why did you reject this scenario?
ELVIRA NABIULLINA:
There are usually two cases when the central bank implements a drastic increase in its policy rate (we also have the experience). One, this is when financial stability risks need to be mitigated, as was the case in Russia in 2014 and 2022, and two, when the response of monetary policy to inflation growth is long past due. To illustrate the latter case, I can cite the example of Turkey in recent years. With its inflation accelerating to 80% and annual inflation persistently at about 70%, the policy rate had long been overly low, and they had to raise it in rather large steps.
In our case, however, there are neither risks to financial stability nor a big gap between current rates and the level of rates required to tame inflation. Already prices in the first half grew at a somewhat slower pace than in the second half of last year. That is, the past year’s rate increase worked to slow inflation in the first half of the year. Although a further tightening is needed to ensure the decline of inflation is irreversible, our situation cannot be compared with Turkey. This is why that option was not looked into.
We cannot raise the key rate much higher now to bring inflation back to target even faster. Why do we think this not the way? There are two sides of the same coin. Were we to do this, we could arrest inflation and even cause deflation given a prohibitive level of the rate. But the outcome would be — instead of a return to sustainable well-balanced growth — an excessive cooling of demand with excessive volatility in interest rates, output, and employment, entailing a strong deviation of inflation downwards from target. Such excessive volatility would have negative implications for economic development. Therefore, such shock therapy-style increases are not needed.
ALEXEY ZABOTKIN:
I suggest we focus not only and not so much on changes in the rate here and now — from 16% to 18% — but on movements in the forecast rate path. The average rate for the next year in terms of the midpoint of the range is up from 11% to 15%, and for 2026 from 6.5% to 10.5%. Both cases are a change of four rather than two percentage points. This is how additional tightening is delivered to today’s decision.
QUESTION from Rossiyskaya Gazeta:
What was the main mistake of many experts forecasting a forthcoming start of rate cuts, early this year?
And one more question, if I may. In recent months, bank deposits have become much more lucrative, with their rates having climbed above the key rate by
ELVIRA NABIULLINA:
Analysts expressed their opinion about the beginning of a rate reduction cycle, and so did we, based on the data as of the beginning of the year. At the beginning of the year, those data pointed to a substantial deceleration in current inflation from the autumn peaks. Inflation expectations were going down. There was no further tightening of the labour market, to say the least. Monetary conditions were tightening. The expansion of consumer activity slowed down, and households’ propensity to save grew. That was factored in experts’ projections and our forecast.
Based on the data available at the start of the year, our forecast assumed room for a rate decline this year. However, this confidence of experts, financial markets and businesses was strengthened by the fact that this is actually the first case of a cyclical overheating in the ten years of inflation targeting, and it requires a lengthy period of high rates to cool demand.
In the episodes of 2014 and 2022, the rate peaks lasted for a short time since they were associated with risks to financial stability and external shocks. The drop in demand then occurred on the back of those external shocks rather than as a response to the rise in rates. Today, high interest rates are a response to overheating demand notwithstanding the upward pressure of all other demand drivers — and this is a crucial difference. It was only in recent months that we came to understand the appropriate length of time for sustainably high rates.
You may have seen that, as new data came in, we began to emphasise that taking inflation back to target would require a longer period of tight monetary conditions. Last month, our message was that we were ready to raise the key rate if inflation risks materialise. Our updated forecast does not assume a cut in the rate this year.
The second question is about returns on deposits, which is several percentage points above the key rate. It is standard practice for banks to set deposit rates above the key rate for marketing purposes — to acquire new clients. This trend has to be watched very closely. Such high rates may only apply to the first several months, and the rates are lower thereafter.
However, rates for mass depositors are overall comparable to the key rate. Before today’s decision, they were comparable to the key rate at the time: under universal terms, the most lucrative rate of return was slightly more than 16%. The actual average rates are indeed lower.
Going forward, the expectations for deposit rates to exceed the key rate are based on the expectations for an increase in the key rate. That is, in the expectation of an increase in the key rate, banks can sustain deposit rates above its current value. As such expectations decline and inflation risks go down, this effect will fade away.
QUESTION from Reuters:
Have you estimated the inflation risks of duties? The Government has raised duties on a number of consumer goods from unfriendly countries. Can the decision trigger secondary effects? What are the implications for inflation?
And another question, please. During the quiet period, some experts suggested that the Bank of Russia reduce the key rate, just as China’s central bank did. Do you generally monitor People’s Bank of China decisions and seek a certain alignment of your policies?
ELVIRA NABIULLINA:
An increase in duties is almost always a driver of inflation, but we expect a limited effect of this move since only a small part, up to 7% of the CPI basket if I am not mistaken, will be affected.
Concerning other central bank policies, we certainly watch them. Among them is doubtless the People’s Bank of China policy. We also watch overall economic developments in China, our key trading partner.
As regards their policy rate decision, their monetary policy stance is different. Their problem is not high but low inflation. At this moment in time, China is approaching zero inflation, and they are pursuing a totally opposite policy. While our priority is to reduce inflation, theirs is to avoid deflation.
QUESTION from Tatar-Inform (news agency, Kazan):
Price growth is now driven by high demand. Have you any fears that the end of subsidised mortgage lending may propel people to channel the available funds into purchases of other CPI goods, instead of houses? This would entail a drastic surge in prices. Alternatively, would the withdrawal from subsidised mortgage lending have a disinflationary effect, and why?
And the second part of the question. Previously, once an apartment was bought in a new build, people started to buy related goods and services: tiles, laminate, plumbing and furniture. Are we going to see a change in the distribution of demand? May it have already changed, and is there early evidence of this?
ELVIRA NABIULLINA:
The core effect of the completion of universal subsidised mortgage lending will be lower inflationary pressures. Although house prices are not included in the consumer price index, a high pace of expansion in loans and specifically in mortgage loans (commercial or subsidised) drives up money supply and domestic demand. Supply failing to match growing demand translates into headline inflation.
Incidentally, growth in house prices has been accelerated, and even exceeds the high growth rates of inflation.
We believe that most households will save, especially in the context of high deposit rates. Some will certainly spend on consumption. However, we expect that a large share of money will become savings, especially given the rise in market rates.
As regards changes in consumer demand patterns, it is probably premature to discuss this. First, these effects are not immediate. Many homes people had bought under subsidised mortgage programmes are still under construction, and will have only become fit to live in over a few years, creating demand for home improvement goods.
Also, people will carry on buying apartments. As a reminder, our forecast suggests that mortgage lending is expected to grow
ALEXEY ZABOTKIN:
Flash estimates on furniture and construction materials suggest that a cooling in consumer demand has yet to emerge. In the second quarter, the growth of prices for these products slightly accelerated relative to the first quarter, as did overall price growth.
Admittedly, there are purely consumer products in this range, but a significant part of home improvement goods are also in demand in other areas of construction. Therefore, their prices will depend on aggregate demand for construction materials from all industries.
QUESTION from Kommersant:
You have mentioned the impact of government incentives and in particular government contracts on corporate lending. Are there any numerical or at least general estimates for changes in this impact? Has it been steadily high, or is it changing over time?
ELVIRA NABIULLINA:
One of the areas where the effects are pronounced is subsidised mortgage. We have seen that most of the mortgage loans issued in recent years are subsidised, which puts strong pressure on commercial mortgages.
There are far less subsidised corporate loans, but the propensity of companies to borrow depends not only on incentives, that is subsidised interest rates, but on government contracts. Government contracts, long-term rather than short-term, propel businesses to take out high-interest loans. However, it is probably impossible to quantify this share.
ALEXEY ZABOTKIN:
It would be a real challenge to quantify this share, and any numbers here may be misleading rather than reliable.
What is important to understand is whether corporate lending is growing in the market part of the economy, or it is growing thanks to companies borrowing to fund operations focused on public demand. What matters is the overall level of demand in the economy to which they respond.
In some areas, government lending programmes do boost credit impulse, as with subsidised mortgage programme, when the level of interest rates on relevant loans was in no way linked to market rates. In this setting of rising inflation and rising inflation expectations, subsidised borrowing under these programmes becomes yet more attractive. The ultimate effect of these programmes is procyclical, giving a boost to credit momentum in the economy even in excess of their volumes.
QUESTION from Forbes:
Recently, the Banking Standards Committee approved a mortgage standard. What could be the responsibility of banks that fail to comply with it?
And question two, please. In
ELVIRA NABIULLINA:
As regards the mortgage standard and the responsibility of banks to comply with standards of the Banking Standards Committee, I welcome the release of the long-awaited mortgage lending standard. We wanted to have a standard to counter unfair, misleading, practices in banking, and now we have the relevant standard.
However, this brings another question you are correctly asking: how do we supervise compliance with this standard? Compliance with it is unlike the central bank’s required ratios. Now, with the Central Bank having supervisory powers, we all understand the need for responsibility. Otherwise this standard may be ignored. We are now in discussions with the Committee about the best way to do this. We have agreed that there should also be a supervisory standard, that is a standard for supervision of compliance. Discussions are ongoing about who is to be the supervisor, the Bank of Russia or the Committee. I hope that our discussions result in a solution to define this responsibility.
At the same time, we welcome market participants watching compliance independently — this is right. A solution has yet to be found.
While on publishing the data, we in fact started publishing in April but then stopped due to the risks of secondary sanctions. While we do not see a link between the realised sanctions and such publication, that decision was meant to mitigate risks. At this juncture, there are no plans to reconsider.
QUESTION from Bloomberg:
The Bank of China has terminated correspondent relations with the Moscow Exchange, and questions remain over correspondent relations with the only remaining counterparty. If exchange trading stops, what is your view about the continuation of fiscal rule-based operations of the Ministry of Finance? Previously, foreign currency was expected to be sold in a centralised market. How will the sales be distributed at MOEX? What are the implications for the ruble?
And my second question is about cross-border settlements, and it follows up on my colleagues’ questions. Cross-border settlements are a major concern. Is it still a possibility that Russia may find itself in a financial blockade as a result of foreign banks, even in friendly countries, fearing secondary sanctions? Do you have a scenario for this event?
And my third question is about overheating. Could you give an estimate of the scale of overheating in the Russian economy? Meaning, is demand running ahead of the supply of goods and services by
ELVIRA NABIULLINA:
On the subject of fiscal rule-based operations, we can conduct them at the exchange and in the OTC market without any implications for the exchange rate. If these risks materialise, we will clarify a specific mechanism to address them. I can however say that we are ready to carry out operations in the OTC market.
While on cross-border payments and the risks, we have different risk scenarios and are preparing for different situations. Basically, I think that businesses will be finding solutions to the payments problems, in one way or another. Many countries need to trade with Russia and conduct export and import transactions, so there will always be a payment method.
We also take into account that relevant transaction costs may be rising. Accordingly, since this may impact exports and imports, our monetary policy factors this in.
While on the overheating, indeed, we judge the economy to be overheated. Let me remind you how we define this. An overheating, or a positive output gap, is a state of the economy when output exceeds the so-called potential GDP, that is the output of products, goods and services the economy can produce with the available resources, technologies, production processes and chains — without rapid price increases or spiralling inflation.
Our assessment of the extent of overheating is based on a wide range of measures. Among the key measures are unemployment, real wage growth, changes in lending, and inflation, and the latter is certainly the key indicator.
We do not present estimates quantifying the scale of overheating as it is an unobservable value, but changes in inflation represent a very important measure of an overheating.
Having said that, our model estimates suggest that in the first half of this year, overheating was probably at a
QUESTION from Bitkogan Project:
The European Commission has banned its citizens from participating in the exchange of assets. Foreigners may therefore be afraid of voluntary exchange. What does it mean for the asset exchange? Is the exchange at all possible?
ELVIRA NABIULLINA:
It is hard for me to comment on the decisions of the European Commission that prevent EU citizens solving their problems with blocked assets. However, we will explore any mechanisms and options to protect the legitimate interests of Russian investors — we will consider all methods.
QUESTION from NTV:
Given the 18% rate, is it possible that consumers may stop taking out loans, while companies are still borrowing at floating rates, to the effect that inflation remains unaffected?
My second question is about fraud. Fraudsters have set up new schemes in which they invent new faces for themselves. They pretend to be from a housing and utility company or the Pension Fund. In a phone call, they ask for a code from SMS, access the Public Services Portal and take out loans. Most of their victims are elderly people. What ideas might the Central Bank have to this effect? Perhaps a cooling-off period would work or some more checks for people of this age, meaning, to put an end to this fraud?
ELVIRA NABIULLINA:
Our decisions influence overall lending trends. Overall changes in lending are of great importance to us.
I have mentioned the issue of floating-rate loans to businesses. Many companies believed that the rate was on course for a decline this year (which was indeed our signal) and borrowed intensely. However, we have moved up our estimate for the key rate path for this year, the year next and past the one-year mark. I think businesses and banks will account for this when taking out or approving a loan.
Retail lending may indeed considerably decelerate, in part due to a cooling in mortgage lending. Overall, we expect lending to grow at a moderate pace, so this will help bring inflation to our 4% target faster.
Now on to fraudsters, unfortunately, the fraud you describe is in place. In fact, senior people are often overexposed to such fraud. But unfortunately, as well as elderly people, such scams target young people, college-educated and others, and even those with a degree in economics, and bank employees.
I believe that a cooling-off period is an important instrument. We have introduced it for money transfers, and are discussing how it can apply to loans. This will make an important measure. We are discussing how elderly people could be protected by a trusted contact rule. They would be asked to designate a trusted person, one of their relatives and someone they trust to be contacted when a financial decision is being made. We will look into all possible options to protect people against this fraud.
QUESTION from 47 News, St.Petersburg:
Why does the increase in the key rate fail to deliver to the full extent? After all, inflation is overall rising across the country.
ELVIRA NABIULLINA:
First, the rate of inflation and lending growth have nonetheless responded to last year’s tightening of monetary policy driven by the key rate rise. If we compare the first half of this year and the second half of last year, inflation has slowed since the autumn peaks. But for that tightening in monetary policy based on a rate rise, and if we had held the key unchanged at 7.5%, we would now face much higher inflation and a much weaker exchange rate.
However, inflation is not descending rapidly to the 4% target. This is explained by several reasons including overheated aggregate demand, high consumer activity, and labour shortages. More so, demand is further supported by a high pace of lending growth.
Monetary tightening is exactly aiming to ease price pressures driven by this additional credit demand and to boost incentives for saving behaviour.
We should also take into account that it takes
This additional tightening of monetary policy was exactly needed to ensure that inflation moves back to 4% faster, given the inertia of all the processes.
ALEXEY ZABOTKIN:
In terms of the pace of movement of interest rates (on both deposits and loans), most of the change occurred exactly in April—June, when it became clear that there was no sustainable slowdown in inflation. Therefore, this means a longer period of sustainably tight monetary policy is needed, and possibly its additional tightening. Accordingly, while attempting to estimate the extent to which the 16% key rate had an effect on the economy, we find that most of this impact has materialised only since the second quarter. That is in part due to the fact that there were expectations of faster decelerating inflation, that is, financial markets, analysts, and our forecast projected that rates were on course for a rapid decline.
Over the background of high inflation expectations, that led to sustainably high demand for loans, which was exactly observed in the first half of the year.
QUESTION from Moskovsky Komsomolets:
Although the Bank of Russia’s key rate had been high enough for six months, inflation did not drop in defiance of the January forecasts, including the Bank of Russia’s forecast. Experts think that a rate increase alone cannot tame inflation. This raises the question: has the Bank of Russia ever attempted to join forces with other agencies to combat inflation? If it has, what is the outcome? If not, are there such plans for the future? For instance, petrol prices play a large role in inflation, which is further strengthened by the rise in rates you were talking about.
And question two, please, which may seem a little naive. If the 16% rate failed to decelerate inflation, why expect 17% to deliver? Why not 19% or perhaps 20%? Why not immediately raise the rate to the appropriate level, short of shock therapy, to ensure inflation is on target by the end of the year?
ELVIRA NABIULLINA:
First, the rate increase of last year did reduce inflation. Inflation in the first half declined from the autumn peaks and even from the whole second half of last year. However, its decline is insufficient and slow.
What is our concern? Indeed, the underlying components of inflation have stabilised. This suggests that a further monetary tightening is needed to make sure the decline of inflation resumes, especially its underlying components. For this reason, we have raised the key rate. Going forward, we will analyse incoming data. A rate increase is not ruled out if we find out that the key rate is insufficient to bring inflation back to target next year.
As regards cooperation with other agencies, each agency operates within its remit. Ours is monetary policy, and we are focused on aggregate demand.
As for the Government, its invaluable contribution in terms of keeping prices in check is undoubtedly a balanced and predictable fiscal policy. It also works for a better-timed monetary policy response to inflation deviating from target. In this sense, the fiscal rule is vital.
We influence aggregate demand through monetary policy at a time when growing demand is not matched by the same pace of supply growth. True, a faster expansion in supply will narrow this gap. That is why the governmental programmes to improve labour productivity, clear bottlenecks and boost economic potential are also impactful since they put inflation on a downward path. Also, we exchange information with the Government. We are aware of the projects the Government is implementing or discussing, just as the Government factors in our policy.
QUESTION from RIA Novosti:
Can we say that inflation is already past its peak? Does the Bank of Russia expect traditional deflation in August? If so, can this affect the key rate reduction?
And a further question is about mortgages. When can we expect the mortgage bubble to burst? Is now a good time to buy an apartment, or is it better to keep your money in a savings account?
ELVIRA NABIULLINA:
On the subject of inflation peaking, monthly inflation rates in July, which include the indexation of utility rates, were really high. A decline in monthly rates is expected to emerge as early as August.
Underlying inflation is set to decline more slowly. Yet we assume that our monetary policy decisions will drive a strong decline in inflation, primarily in underlying inflation.
ALEXEY ZABOTKIN:
While on deflation in August, we always say that there is no such thing as deflation for one month. Deflation is a process of a steady decline in the overall price level. It makes sense to discuss it over a one-year or longer horizon.
What we saw in August was a seasonal downturn in fruit and vegetable prices. A fairly strong decline triggers a one-off decline in overall monthly price, but this is not deflation, please avoid this term.
As regards the dynamics of the underlying components, core inflation peaked last autumn in the September to November period. It thereafter slowed in the first quarter, rising slightly in the second. Month-on-month readings for July are also likely to be high, even seasonally adjusted and adjusted for the rise in administered prices, which should be partially stripped out. We expect price growth rates to be much lower over the course of the second half than average readings for the first. Actually, our forecast assumptions account for this.
ELVIRA NABIULLINA:
The imbalance in the mortgage market will be disappearing gradually. Let me reconfirm that we expect mortgages to continue to grow
As for the choice of time to buy an apartment, this is all about your real-life situation and your own needs. However, we assume that growth in house prices will slow down and may come in lower than growth in household income, which has outpaced inflation. This is a consideration in making house purchase decisions.
QUESTION from RBC Kavkaz:
1 July marks the end of the subsidised mortgage programme in Russia. What does it mean for real estate prices? Is this decision expected to help cool the market, including in the south of Russia? If this is the case, is there a risk of developers stopping to plan new projects or even suspending those under construction?
ELVIRA NABIULLINA:
House price have indeed grown strongly in the south of Russia, on the back of very high demand for housing there, among other factors. We believe that the exit from the universal subsidised mortgage programme will indeed deliver a cooling in the market and balance its growth.
It is difficult to estimate the dynamics of house prices in the property market: this is a market defined by many regionally specific factors. However, the expected effect is that house prices will stop rising at such a high pace.
The key data to watch is not just mortgage rates and the size of their decline but the affordability of housing, based on the household income to property price ratio. Housing affordability is likely to grow.
The universal subsidised mortgage programme has led to growth in property prices running ahead of incomes, undermining the affordability of housing in a number of regions. But we now expect the affordability of housing to improve gradually.
There should certainly be no expectations for an instantaneous price adjustment. According to economists, here we may see the ratchet effect, an effect that works in the economy. Importantly, the targeted subsidised programmes that remain are sufficiently large-scale. This is also a factor to consider.
ALEXEY ZABOTKIN:
Let me remind you that our particular concern was the divergence between primary and secondary market prices. The smaller scale of subsidised programmes is certain to markedly narrow this gap between primary and secondary market prices.
ELVIRA NABIULLINA:
Speaking of developers, we expect a slower pace of demand, but the demand will grow regardless. This factor is set to affect developers. Revenues, or financial results, are projected to grow at a more modest pace than in recent years, But in the recent years of very rapid expansion, major developers have built a cash cushion and so have a sufficient margin of safety to complete and possibly start new projects, although the situation varies from developer to developer.
Developers may face difficulties if they have excessive credit exposure and their market expansion was funded by borrowings. However, we are monitoring the situation, and there are no financial stability risks.
QUESTION from Russia 24 TV channel:
Could you give us an update on the creation and integration of the BRICS payment system? I mean the creation within BRICS of an independent settlement and payment system to be based on cutting-edge technologies such as digital currency and blockchain.
ELVIRA NABIULLINA:
We have joined forces with the Ministry of Finance, and are discussing this project with our BRICS partners. As I have said, this is a rather complicated project, and it will take our partners and us some time to finalise its concept before we can promote it. We are in a discussion stage. Importantly, this means that we will also rely on other methods and opportunities to enhance settlements.
QUESTION from Fomag.ru:
Are the recently implemented measures sufficient to stabilise lending, or do we need any additional measures beyond the key rate and these measures?
My second question is about inflation. What is the most appropriate measure of inflation to watch now? Meaning, many analysts have recently been focused on weekly rates of inflation. Is this really a representative measure, or do we need to watch monthly and other indicators, or identify any individual components? Which indicator is best to watch?
ELVIRA NABIULLINA:
In response to the first question, overall, higher loan rates have a restraining effect on the volumes of lending. The key rate is the main instrument enabling the Central Bank to influence loan growth. An alternative approach could be macroprudential policies targeting individual segments of lending, instead of the key rate. We are firmly convinced that macroprudential measures cannot at all substitute the key rate, with the key influencing overall growth in lending rather than individual segments; the key rate also influences savings and how they are attractive.
Macroprudential measures prevent financial stability risks associated with debt-laden borrowers. They propel loans to be redistributed within a sector from higher-risk to lower-risk borrowers. The implications of this redistribution for consumer lending are a shift towards corporate lending, to the effect that overall growth lending may remain unaffected. Therefore, the main tool is certainly the key rate.
Speaking of the best data to watch inflation, we rely on multiple measures of inflation. While weekly indicators are far from perfect, we do analyse them, but it is impossible to draw conclusions based on weekly indicators due to the shorter list of goods and services.
I would like to ask Mr Zabotkin to elaborate on the indicators we focus on to watch current inflationary pressures. Current inflationary pressures are crucial, while annual inflation is akin to a rear-view mirror.
ALEXEY ZABOTKIN:
Indeed, we analyse a broad range of indicators from the consumer price index to various narrower baskets of components. Their non-exhaustive list, which does not probably include the whole variety of indicators, is contained in Consumer Price Dynamics, our monthly review. Overall, the indicators in this review are an important part of overall change analysis.
What we are against and what we caution analysts against is relying on one or two or three indicators to gain a full picture of current price trends (or even price trends over the whole year), for the reason that inflation is a change in the overall price level. If you strip out the components you do not like to draw the conclusion you mean and in fact fit the result to the desirable answer, you ultimately lose information and gain a biased picture. What we can say for sure now is that price growth in the second quarter was higher across all inflation indicators than in the first quarter — which should not be the case under sufficiently tight monetary conditions. This is why a further tightening in monetary policy is required to resume the irreversible process of inflation decline to the 4% target.
ELVIRA NABIULLINA:
It is also important to note that beyond these statistics and the shorter sets of indicators, our focus is on inflation expectations, on how inflation is perceived by households, on observed inflation. It is imperative we understand how people perceive inflation and which inflation they expect — since this determines their consumption and saving decisions. This directly affects how quickly we can bring inflation back to target.
QUESTION from Elakhovsky (YouTube channel):
You have said on multiple occasions and today, that it takes several-quarter lags before tight monetary policy affects inflation. The rate has held at 16% for six months, but inflation has grown all the same. What do you think is the cause? Were the two quarters not enough for the 16% rate to make the difference? Perhaps the rise to 16% was small then, and the rate had to be raised higher back in December 2023? Or rather, the cause is that it is difficult to neutralise the source of current inflation by raising the rate?
My second question relates to the labour market. Currently, there are labour shortages, recognised by an overwhelming number of experts, but at the same time the migration regime tends to tighten. Does the Bank of Russia intend to assess the impact of risks from lower inflows of labour migrants on inflation? How large are these risks?
ELVIRA NABIULLINA:
Let me start with the labour market. The state of the labour market is surely one of the key indicators we watch. Labour shortages are rising further. According to recent surveys, as far as I remember, 72% of businesses view staff shortages as the key constraint, and this is a critical indicator.
Certainly, migration flows influence the extent of tightness of the labour market, which we take into account.
Now on to monetary policy, whether it has been tight enough or not. Whereas a drop in inflationary pressures was reported after the rate increase, the Board of Directors collectively believes that a further tightening is required since core inflation in the second quarter came in higher than in the first.
We might have been more conservative in our estimates including the estimated impact of budget operations on lending growth, and not only of direct subsidised mortgage programmes, but also any increases in budget expenditures, given that they lead to a higher credit multiplier.
Second, our projections for the key rate path and other factors had shaped market expectations for a very rapid rate cut, so spurring credit activity. The changes came in the spring. As I have said, the tightness of monetary conditions has yet to fully feed through into the economy. Our estimates confirmed the need for a further tightening, and we raised the key rate.
ALEXEY ZABOTKIN:
A small semantic clarification: credit activity was more than spurred — it held at a level that precludes inflation from moving back to 4%.
QUESTION from Izvestia:
Please allow me to ask two follow-up questions. First, about the interaction with other agencies. Mr Peskov said yesterday that the Government and the Central Bank are working out additional measures to check inflation. He emphasised that targeting is priority number one.
Number two is mortgage loans. You have sought the end of subsidised mortgage lending. However, our family mortgage criteria have even been expanded to include families with two children aged over six, applicable to individual housing construction. Will this expansion in large part offset the withdrawal from subsidised mortgages?
Do you support the Ministry of Finance’s position regarding the need to significantly raise interest rates on the Arctic and Far Eastern mortgage loans? The rate is now 2%.
And my last, new, question is about systemically important credit institutions. What criteria lay down the list of systemically important credit institutions? Are foreign credit institutions winding down operations in our country likely to exit from this list?
ELVIRA NABIULLINA:
Your first question, if I am correct, is about the additional measures to contain inflation being considered by the Government and the Bank of Russia.
We influence demand, and so does fiscal policy. Fiscal policy is the Government’s function, but the Government also influences supply. While our influence targets demand, the Government influences both demand — through fiscal policy — and supply in large measure.
This is delivered through a very large package of measures. The Government is working on the development of infrastructure and debottlenecking, among other things. There is a labour productivity programme aimed at boosting economic potential. Our policies are conjugated, so to speak.
As for mortgages, the general rule that applies is that the larger amounts of subsidised loans, the less room for market loans; the larger amounts of subsidised mortgages, the less room for unsubsidised mortgages. Unsubsidised mortgages are very sensitive to the key rate. We have seen a decline in mortgage loans after the increase in the key rate.
We therefore consider all these factors (volumes of subsidised loans) and can see the implications for unsubsidised mortgages.
The criteria for subsidised programmes including regional programmes are up to the Government. Certainly, current rates involve a large amount of subsidies for such mortgage loans.
As for systemically important credit institutions, we are updating their list in the autumn, and may update their criteria. We consider all the aspects of systemic importance. We have yet to make this analysis, and it is premature to say which banks will remain and which will not. As of today, there are no grounds to exclude Russian subsidiaries of foreign banks from the list.
ALEXEY ZABOTKIN:
It would be too early to make any conclusions before the end of the third quarter about the intensity of the ongoing family mortgage programme. I believe that any meaningful comments on this matter will not come before the Board policy meeting in October.
QUESTION from RBC:
My question is about the yuan. Our colleagues from Vedomosti wrote that some Chinese banks divide the yuan amounts into clean and dirty money. Dirty money is linked to Russia and includes amounts bought on the Moscow Exchange. The banks are allegedly reluctant to work with these ‘dirty’ yuan. Does the Bank of Russia recognise this problem, and what are the potential solutions?
ELVIRA NABIULLINA:
We can see problems with cross-border payments, the use of foreign currencies, and the risks of secondary sanctions. Nonetheless, we do not provide specifics of the mechanisms and solutions to the problem of cross-border payments, as I have said on several occasions.
QUESTION from the blog Anna_finance:
Our subscribers are worried about the risk of their bank deposits being frozen. Clearly, current deposit rates are very lucrative and people are willing to put money into deposits. Could you please allay fears about the safety of savings?
My second question is about mortgage loans. The family mortgage programme has been extended. We had waited for ten days for the announcement. Ten days later, Mr Khusnullin said that the terms may be up for review in the autumn. Clearly, the state seeks a balance between supporting families and developers. What steps are being made to strike this balance, so protecting developers from a sharp drop in sales and ensuring homes are affordable to families? Perhaps another intermediate rate could be considered, rather than 6%?
ELVIRA NABIULLINA:
Speaking of household savings, deposit rates are now very good for savings. Not only do they protect savings against inflation, but also earn an income. People are free to decide subject to their real-life situation whether they need to save.
Regarding a possible revision of the family mortgage criteria, we believe that evidence is needed of more sustainable mortgage growth rates to look into this matter.
Based on the July data, there is no such evidence. The higher growth rates are explained by a large numbers of borrowers seeking to bring forward their applications from July to June. In July, the family mortgage programme was not operational for almost two weeks, so conclusions are impossible based on this data. We need to study the August and, possibly, September and October data to make a judgement.
Speaking of the balance, I will say again that thanks to developers having built a cash cushion, mortgages are not in for an abrupt drop — they are on course to grow. The most crucial measure to watch is in my opinion how our policies work for the affordability of housing. This is what I view as our top priority: ensure that the growth of housing prices does not outpace household income, and make mortgage loans affordable for many rather than only for recipients of subsidised programmes.
Broadly available mortgages can only be driven by lower market rates and lower inflation. Let me remind you once again, mass mortgage lending was growing without costly budget support when we reduced inflation and kept it close to 4% for a while, with market mortgage rates at about 8%. Mortgages then became widely affordable. Therefore, in my opinion, the key enablers of affordable housing are low inflation and moderate mortgage rates, which make for affordable mortgage loans.
QUESTION from Vedomosti:
Will you please clarify your comment on corporate and retail loans. Does the Bank of Russia consider the introduction of macroprudential measures in relation to corporate lending?
And the second question, please. Don’t you think that administrative measures are needed to ease a tight labour market? What measures could these be?
ELVIRA NABIULLINA:
The Government is working to increase the flexibility of labour and bring more people into labour force. However, the key measure is narrowing the gap between growing demand and supply — which is behind a tight labour market.
Macroprudential measures for corporate lending are technically feasible. Such macroprudential measures are in place in some countries; but again, if introduced, they will not aim to influence growth in corporate lending but to prevent high-risk, i.e. overindebted, borrowers from overborrowing. As regards individuals, we know that at some point overindebted borrowers cannot service their debt. We acknowledge this problem.
Businesses can have the same problem when their earnings, estimated revenues, are insufficient to service their loans. Businesses often take loans either to fund mergers and acquisitions or a market expansion without understanding the associated risks. Macroprudential policies can help prevent such scenarios. We discussed this subject a while ago, but we have yet to make a decision.
ALEXEY ZABOTKIN:
Since there are many questions on this subject, I would like to give an example illustrating why macroprudential policies have little effect on overall rates of lending growth — unlike the key rate. How do these policies work? They constrain banks in issuing loans that are more profitable for them, i.e. high-risk and thereby higher-yield loans, as long as borrowers pay higher interest for higher-risk loans. Even accounting for loan loss provisions and macroprudential add-ons, banks find it more profitable to issue higher-risk loans, all else being equal.
However, if our macroprudential policies make high-risk loans less lucrative for them (while they still find low-risk loans profitable to issue since the interest rates are not so high as to limit the demand), banks will just shift their focus towards low-risk loans. This will lead to the same growth in aggregate demand, but it will come with lower risks.
This is why macroprudential policies are essential in managing credit risks of the financial system. However, it normally takes a change in the overall level of interest rates to influence total credit.
ELVIRA NABIULLINA:
Another point on this subject, macroprudential measures do not influence the appeal of savings, but the key rate does. This makes the key rate an effective tool. We will stop short of resorting to macroprudential measures to influence lending growth.
QUESTION from Frank Media:
If I remember correctly, we have a rather large portfolio of loans with the floating rate of 50%. Doesn’t this movement in the rate and a longer period of tight monetary policy involve any risks for corporate borrowers — considering their hopes that a rate cut is due — and for banks?
And question two, please. You have said that your decision considered the materialisation of sanction risks among other factors. Do you mean cross-border settlements? How do they impact on inflation? That is, they clearly represent a proinflationary factor. Are there any calculations to this effect?
ELVIRA NABIULLINA:
The rate hike will most likely reduce the growth of floating-rate loans. Businesses and banks, being aware of the path of interest rates, are unlikely to raise loans at the same pace as they have until now.
As for the impact of the outstanding loans on businesses and banks, we analyse how companies in the broader market are ready to service loans at higher rates. By the way, when issuing these loans, banks assess how well the borrowers will be able to service them in the event of a rate rise.
This must have been largely factored in by banks and companies when they raised floating-rate loans, and they also factored in their fairly high profits, cash flows, enabling them to service such loans.
We conduct analysis of financial stability risks, including interest rate risks. There are no such risks in view. However, individual companies may indeed be in trouble. These are primarily overindebted companies with large amounts of floating-rate loans, and their debt-to-EBITDA ratio is above normal. More so, such problems arise in other situations when companies do not fully calculate the risks involved with loans.
Now on to the impact of the difficulties with cross-border transactions on inflation. On the one hand, these difficulties can reduce imports. This is however not the case, and imports have been steady in recent months. Admittedly, the statistics can only show us the imports we had paid for, that is, it includes payments made in advance. Difficulties with import settlements may take two to three months to be reflected in statistics on imports.
Overall, if this factor works to constrain imports, it can be credited with a strengthening of the ruble, all else being equal, while a stronger ruble is a disinflationary factor in principle. Having said that, such problems with cross-border settlements alongside new settlement arrangements involve higher costs for importers and thereby higher prices for imports, that is, these two factors may offset each other. It is yet hard to say to what degree they offset each other, or even make calculations.
ALEXEY ZABOTKIN:
This will depend on how successful the private sector will be able to operate in the face of aggravated sanctions pressure. In the event sanctions worsen the terms of trade for the broader economy, the effect is equivalent to a deduction from the economy’s potential, all else equal. In this sense, this effect is proinflationary, coming as a result of the interaction between the exchange rate and the factors related to prices for available imports from global markets.
Thank you for your questions.