Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 25 October 2024
Good afternoon,
Today, we have made the decision to raise the key rate to 21% per annum.
Price growth has accelerated since September. Inflation expectations have risen as well. Lending has continued to grow rapidly. Due to limited labour resources and high capacity utilisation rates, enterprises have been increasingly experiencing problems with expanding their output of goods and services. Moreover, the Government has announced an additional increase in budget expenditures this year, as well as a more considerable tariff indexation and a rise in the recycling fee. Some of these factors have already translated into high inflation in 2024 that is to reach
I would now dwell on the reasons behind our today’s decision.
Firstly, inflation.
Overall, we can see no signs of its slowdown. In September, current price growth sped up again, largely in terms of its underlying component. Core inflation, one of its indicators, exceeded 9%.
Inflation expectations increased significantly, reaching the highest level over the year among households. Businesses’ price expectations were up as well, most notably among retailers. This is yet another indicator of elevated price pressures caused by demand-side factors.
In the next few months, price growth rates will also be affected by a recycling fee increase. This will have a substantial impact on inflation, given a large weight of passenger vehicles in consumer expenditures, which accounts for 4.6%.
Another proinflationary factor is the rise in housing and utility tariffs and rail transportation rates at a pace that is significantly above the inflation target. This is another argument in favour of additional tightening of monetary policy. Taking into account our decisions, annual inflation will equal
Secondly, the economy.
The economy continued to grow in 2024 Q3, although at a more moderate pace. In the previous statement, we noted that the slowdown in economic activity might be associated not so much with cooling demand but rather with more severe constraints preventing companies from expanding the output of goods and services. Strengthening inflationary pressures are an additional evidence that the slowdown in economic growth is largely associated with supply-side constraints rather than with the demand dynamics.
As regards demand, its increase slowed down somewhat in July—August in terms of consumption and investment. However, preliminary data on economic activity for September suggest that this process has not become sustained so far. According to our Monitoring of businesses and the evidence from our regional branches, consumer activity remains high. Monitoring of businesses also shows that companies expect a further rise in investment activity. Another factor supporting demand is the announced rise in budget expenditures this year in the amount of ₽1.5 trillion.
As to an increase in the output of goods and services, the problems hindering this process have become more acute. Available production capacities and labour resources are being used increasingly intensely. The labour market remains tight. Moreover, according to a recent business survey, the problem of staff shortages has become even more severe. The seasonally adjusted unemployment rate in August stayed close to its record low of 2.5%, while wages were still rising faster than labour productivity.
There are also other supply-side constraints that are both of a more general nature and related to particular industries. In addition to staff shortages, companies have been increasingly facing other challenges, such as logistics bottlenecks and more complicated supply chains. As regards constraints in specific industries, they have affected the oil and gas sector due to the voluntary production cuts under the OPEC+ agreements, as well as agriculture which suffered a decline in yields caused by severe weather conditions.
Even as demand is cooling somewhat, the output gap in the economy does not diminish due to persistent supply-side constraints, which is exactly what is generating elevated price pressures.
Now, as regards monetary conditions.
Since our previous meeting, the yield curve of federal government bonds has shifted upwards across all maturities. Higher long-term interest rates suggest that market participants’ doubts that inflation will return to the target over the medium term have intensified. In other words, their inflation expectations increased again. For us, this means that monetary policy should be more restrictive.
Overall, monetary conditions have tightened. However, given rising inflation expectations, the tightening of monetary conditions in real terms has been less considerable than that reflected in nominal interest rates. I would like to stress that the level of tightness should be measured exactly this way, that is, by subtracting expected inflation rather than its actual rate over the last 12 months from the level of interest rates.
So far, we cannot observe a notable slowdown in overall credit activity. The fast increase is mostly accounted for by corporate lending. This segment is less sensitive to key rate rises as a considerable proportion of loans are issued under subsidised programmes, for project financing, or to complete investment projects and government supported projects that were launched earlier. Nevertheless, the demand for loans at market interest rates has been weakening.
Retail lending has started to respond more notably to the key rate increase, tougher macroprudential measures, and the termination of the non-targeted subsidised mortgage programme. The monthly growth rate of the retail loan portfolio has halved compared to May—June.
Households’ demand for time bank deposits was up in August and September. As before, rising incomes allow people both to consume more and save more. Our today’s decision will increase households’ saving activity.
In our updated forecast, we have raised the estimated growth rate of lending to
Now, I would like to speak of external conditions.
Global economic growth has been decelerating. This implies a more moderate increase in external demand for Russian export goods. There are two factors having opposite effects in the oil market. On the one hand, rising tensions in the Middle East have pushed up prices. On the other hand, a slower expansion of the world economy has been decreasing the demand for commodities. We have reduced the forecast of oil prices for this year by $5 to $80 per barrel. The forecast for 2025 has been left unchanged. As to the forecast of the current account balance, there have been no significant changes over the three-year horizon.
The updated forecast of the balance of payments takes into account actual data. In 2024 Q3, the value of exports remained stable, whereas the value of imports exceeded the expected level, which has affected the ruble exchange rate. In the future, the key rate increase will be containing imports by cooling domestic demand.
I would now dwell on the risks to the baseline forecast.
Broadly, the range of these risks has stayed the same. In the first place, these include the demand and supply gap caused by persistent demand overheating or by an increase in constraints limiting the capabilities to expand the supply of goods and services, primarily because of staff shortages. Furthermore, there are still risks related to foreign trade, geopolitical events, and inflation expectations.
As to disinflationary factors, these are a faster reduction in demand and a more considerable increase in the economy’s potential and labour productivity.
Winding up, I would like to comment on the future path of the key rate.
The economy has been facing serious shocks over the past three years. Enterprises have been forced to rearrange their production and logistics chains or even establish new ones in many cases. These conditions inevitably entail sharp changes in relative prices, which enables businesses to adjust to the new reality rather quickly. Over the past three years, prices have risen by 30%. However, the structural transformation in the economy cannot any longer explain the price increases over 2024. They were induced by more severe overheating of demand that was expanding faster than supply. Amid labour shortages and high capacity utilisation rates, any further attempts to refer to the increase in prices as a prerequisite for structural transformation will cause a dangerous high-inflation situation in the economy that will create considerably more problems than benefits. In other words, price rises will become a factor constraining the development rather than a way to adjust to the new environment.
The Bank of Russia remains determined to return inflation to the target of 4%. Despite a rather notable increase in the key rate, annual inflation this year will be twice as high as the target. However, this does not mean that the key rate is inefficient. If not for its increase, inflation would have been much higher. Anyway, how can that considerable deviation of inflation from the target this year be explained? Amid the heightened uncertainty of recent years, the effects of many mechanisms in the economy have changed. We see several reasons why the response of inflation to the rise in the key rate has become less pronounced.
First of all, this is the increased inertia of inflation expectations due to the fact that the inflation rate has been exceeding the target for four years already. The longer the period of the deviation of inflation from the target, the less confident households and businesses are that it will return to its low levels. This is reflected in their behavior: propensity to consume, invest or save.
The second reason is the impact of expansionary fiscal policy, including as a leverage for taking out loans for those households and companies whose incomes grow due to fiscal spending.
The third reason is a range of factors in the banking sector. Regulatory easing measures made it possible for banks to expand lending aggressively neglecting the need to maintain a more liquid asset structure and to additionally accumulate capital buffers.
Finally, this is the Bank of Russia’s inaccurate communication at the beginning of the year. Our forecast assumed a reduction in the key rate following the slowdown in inflation. However, that was largely perceived as our intention to cut the key rate in any case. This motivated households and businesses not to reduce their demand for loans.
These are very different factors, but all of them have had the same effect. Consequently, overheating in the economy has turned out to be stronger, which has led to faster price growth. Therefore, to achieve the inflation target, we will be responding to proinflationary risks in an even more conservative manner. The level of tightness of our monetary policy will be determined by the objective of bringing inflation down to the target.
We will need a considerably higher key rate path than we assumed in the July forecast. The key rate will average 17.5% in 2024,
Thank you for your attention.
Q&A for the Media
QUESTION from TASS:
Ms Nabiullina, were there any arguments made today in favour of raising the key rate above 21%? Do you consider it possible that similarly decisive steps might be taken at the December meeting?
ELVIRA NABIULLINA:
First of all, we considered three alternatives today: raising the key rate to 20%, to 21%, or above 21%. Keeping the key rate unchanged was not an option, and nobody suggested it. However, we did substantively discuss the alternatives of a 20% and a 21% increase.
The possibility of raising the key rate in similar steps at the upcoming meeting will depend on the data we receive: data on economic development, inflation, inflation expectations, and overall lending growth rates. Nevertheless, we do admit that there might be an additional increase in the key rate in December.
QUESTION from Interfax:
Do we understand it correctly that your target is not strictly confined to 4% but rather is a ‘close to 4%’ level? Is it correct to assume that your 2025 inflation forecast deviates from the target?
And one more question, if I may. What main factors, in your opinion, carry significant proinflationary risks: is it the budget alone or the budget coupled with the utility tariffs and the recycling fee? How strong will the effect of the weaker ruble be on inflation? Have you changed your estimate of this factor’s contribution to inflation?
ELVIRA NABIULLINA:
As regards the target, we believe that the current price growth rate will be close to 4% at the end of 2025, while annual inflation will reach the target in 2026 H1.
As to the main proinflationary factors and risks, I have just mentioned them. The key factor is the imbalance between supply and demand, which will persist for a number of reasons. The main risks could also include factors related to the budget. We always say that the budget and changes in it are important factors that we take into account. Moreover, it will depend on the lending growth rates, especially its overall growth. In terms of monetary policy, it is the overall lending growth rate that is important to us, rather than retail and corporate loans taken separately. Inflation expectations are, of course, another major factor, and, unfortunately, they remain high and have even increased.
As for the utility tariffs and your question about the recycling fee, these factors account for an aggregate of a 1 percentage point contribution to inflation if we are talking about their direct impact. Nevertheless, our monetary policy is aimed precisely at limiting these effects and secondary effects as both the increase in the recycling fee and rising utility tariffs are major drivers of inflation expectations, through which they influence the overall price growth rate.
Therefore, we must address these factors as part of our monetary policy response. We pay attention to all of these factors and will keep taking them into account when making decisions.
Speaking of the effect of the exchange rate, we factor it in too. Indeed, recent months have seen a slight depreciation of the ruble. We have not changed our estimate of its contribution to inflation: if I remember correctly, it is around 0.5 percentage points for every 10% of exchange rate fluctuations. However, if we look at more long-term exchange rate trends, it becomes clear that the ruble is approximately at the same level as it was a year ago. It is volatile during the year and we factor it in when making decisions and analysing the situation.
QUESTION from Kommersant:
We see that despite its independence, the Central Bank still participates in meetings with both the Presidential Executive Office and the Government, apparently, to somehow coordinate the efforts to avoid the stagflation risks you have mentioned. How would you describe this coordination? How do you communicate? To what extent is this coordination complicated by surprises, such as the recent surge in budgetary expenditures?
ELVIRA NABIULLINA:
Our interaction with the Government is rather constructive: of course, we exchange our views on economic development during meetings – working meetings – and explain the reasoning behind our actions. I feel like we do hear each other. Anyway, we understand each other’s frames of reference and discuss both the current situation and forecasts.
Sometimes our estimates of the current situation and forecasts are very similar, while sometimes they are different, but this is normal. We make decisions based on our own forecasts as they are an integral part of inflation targeting. We do have our own forecast, which is updated four times per year.
Fiscal decisions and predictable fiscal policy are certainly of great importance to us. I will never tire of repeating it. Adherence to the fiscal rule is surely another significant factor restraining inflation.
Now, as for certain decisions that arise. Indeed, having worked in the Government, I know that many decisions regarding additional budget expenditures are finalised at the very last minute, the reasonableness of the expenditures is justified, and so on. Therefore, we only know the final figures after they are finalised inside the Government.
However, at the last Board of Directors meeting, we understood that there were certain discussions and certain risks, which is why we highlighted possible changes in fiscal policy as one of the major risks to our baseline scenario. But we cannot factor these changes into our decision until they are announced and we understand their scale. This is exactly what has happened by the date of this meeting.
QUESTION from Frank Media:
During private discussions, banks say that one of the most efficient tools against inflation that the Central Bank currently has is the liquidity coverage ratio. None of these banks and no one in general expected this tool to work so well.
With the current RUONIA rate, which is now lower than the key rate and has stayed at this level for quite a long time, we see that banks are setting their deposit interest rates at
And a second question, a very brief one. In the non-financial sector, we see many transactions in which shareholders sell a business to its management team, but there are no such transactions in the banking sector. Are there any management teams for whom you would approve a management buyout?
ELVIRA NABIULLINA:
As for the liquidity coverage ratio and the efficiency of this tool, in my statement today, by the way, when I was talking about the reasons why inflation has responded to the increase in the key rate more slowly than we expected, I mentioned the easing measures in the banking regulation as one of the contributing factors. Indeed, these easing measures allowed banks to expand lending more aggressively than they would have been able to without these measures. Certain banks are using them more actively than others.
However, the liquidity coverage ratio is not a tool against inflation, but the key rate is. Nevertheless, now that we have cancelled the easing, its normal application may have a restraining effect on credit activity, and we are taking this into account. Still, we are returning to its use and determining its parameters not to counter inflation, but rather to ensure that banks maintain the required level of highly liquid assets to have a safety cushion made up of these assets as a preventative measure in case of a crisis (even if it is not very likely) and a deposit run. We are now returning to the use of a standard ratio.
We announced this return and the cancellation of the easing of the liquidity coverage ratio in advance, but, unfortunately, not all banks were prepared for it. Apparently, they thought we would go soft on them and that they would somehow manage to persuade us. So, yes, in several cases, they have to make up for the time lost.
I would also like to highlight a certain point again. You are right that, in a sense, this could be called a deficit of regulatory liquidity, but there is no payment liquidity shortage in the system. I hope everybody understands and admits it.
Now, speaking of management buyouts, I recall that there was one bank whose management team wanted to buy out its business a while ago. We do consider these applications when they are submitted. Nevertheless, there are certain requirements established by law (which is important to understand) for the acquirer of a bank to have an adequate amount of net assets to prop up the bank in a difficult situation. Therefore, if the management team of a bank has the required volume of assets to support the bank it intends to purchase, we will surely consider such an application as well as other applications, if any.
QUESTION from RTS TV, Abakan:
The high key rate has resulted in a significant increase in households’ bank deposits. Likewise, legal entities are also depositing their money with banks at high deposit rates, i.e. businesses are withdrawing their funds from circulation en masse, which means that their economic activity is shrinking.
In this environment, there is no reason to expect the expansion of supply, which would keep up with demand, thus reducing price growth rates. What is the Bank of Russia’s assessment of these risks?
ELVIRA NABIULLINA:
I understand your concern about the fact that the economic activity of enterprises has to keep growing, but the idea that bank deposits are money that has been withdrawn from the economy is incorrect.
Deposits are the main source used to finance bank loans. If we look at today’s figures, we will see that companies and households have deposited ₽116 trillion with banks, but this money is not just taking up space – banks use it to finance the loan portfolio, which accounts for ₽122 trillion in the economy, as well as to invest in corporate bonds (another ₽7 trillion). Accordingly, loans and bonds are a source of financing for businesses’ economic activity as some loans are granted to companies and some to households.
This is the main function of banks – to raise temporarily available funds from economic agents and redirect them to those who need them, those who are ready to invest them. For example, if a company deposits money with a bank, waiting for the right time to put it into business, it means that this money is used to finance a loan to another company that already sees an opportunity to expand its business at this very moment. It is a movement of resources (capital in this case) to where they are needed, similar to, for example, a shift of workers into a sector where the labour shortage is greater and therefore wages are higher.
And I have to say that in economic terms, it is not much different from a situation where, for example, a company that has available funds pays them out as dividends instead of depositing them, while the shareholders who receive these dividends use them to buy corporate bonds issued by the same borrower for loans. You would immediately see that as an investment. It is just that it looks a little different in the case of a loan.
Now, the question about the deposit growth rate. Corporate deposits are now growing slower than households’ deposits. Since the beginning of 2024, companies’ deposits have gone up by 6% and households’ deposits have increased by 15%, which is, by the way, a twofold rise as compared to the previous year and is explained by the growth in incomes and a willingness to deposit money at high interest rates, among other factors.
QUESTION from Russia 24 TV:
Ms Nabiullina, according to the new forecast, inflation will be
ELVIRA NABIULLINA:
Once inflation begins to decelerate steadily and we see that it is decelerating according to our forecast, this might indeed be a signal for us to start decreasing the key rate. We cannot tell exactly when this is going to happen, but you can have a look at our forecast of the average key rate for 2025. This forecast means that a certain decrease in the key rate is possible next year, provided there is a sustained slowdown in inflation.
However, I would like to emphasise the following, taking into account the lessons learnt from the past. In the beginning of 2024, when we expected inflation to start falling and the key rate to start decreasing, unfortunately, many perceived it as a signal that the key rate would be cut anyway, whether inflation declined or not, and acted accordingly.
Hence, it is critical for us now to make sure that inflation is slowing down. If it is decelerating steadily, then, yes, cuts in the key rate are possible.
ALEXEY ZABOTKIN:
I would like to add to this message that those who think inflation will not decline next year should not expect the key rate to decrease too. One cannot simultaneously expect both inflation to stay the same as this year and the key rate to become lower at the end of 2025 than it is now. It is simply impossible.
QUESTION from NTV:
Businessmen keep claiming that the Central Bank is inhibiting economic growth by raising the key rate. For example, Alexey Mordashov recently mentioned it. What do you think about his arguments that inflation at
And one more question, if I may. The key rate is now 21%, while it was 20% in February—March 2022. Does this mean that the situation is worse now than it was back then or that it may become worse?
ELVIRA NABIULLINA:
The key rate has never ceased to influence the economy and inflation. It is a never-ending process. We are confident that we affect inflation by using the key rate, and we see it. Moreover, amid overheated demand, the downward impact of the key rate on inflation is greater than its decelerating effect on economic growth.
You know, it is very important here to see it from the perspective of businesses as well as from the macroeconomic perspective – to look at the economy as a whole. Every company thinks, ‘If I get money cheaply, I will invest it and revive the economy if not entirely, then a very large part of it; I will boost labour productivity, and the economy will surge’.
What is more, this may even be true when there is a downturn in the economy, along with available capacities and workforce. Indeed, during such periods, we pursue accommodative monetary policy to achieve this effect. However, this is not the case when the economy is overheated and the unemployment rate keeps hitting all-time lows.
Could a lower key rate help these companies ramp up output? It seems like it could for certain companies, but for the economy as a whole – probably not. Why? I will elaborate on that, because, unfortunately, this is a widespread misconception, and I would like to explain why the effect that certain enterprises are waiting for is not going to occur.
Let us say a company receives cheaper money. There are three options as to how to use it if we are not taking into account the option of going to the foreign exchange market (which we cannot know) or withdrawing cash. If a company is really willing to invest in labour productivity and production expansion, it has three main options.
The first is to attract additional labour force (if the company has production capacities) or to increase the number of working shifts. Alas, there are no available workers in the economy. Now, what could you use a cheap loan for? You could try to lure employees from another company by offering them higher wages. However, the whole economy is taking out cheap loans in this case. This means that another enterprise has also raised a cheap loan, so it can offer higher wages too. Essentially, this would result in a wage race without any productivity growth, and the overall economic growth would not get any faster.
The second option would be to really improve labour productivity by purchasing equipment for this purpose. Let us say this will be domestically manufactured equipment. To be able to purchase this equipment, it must be produced in greater quantities than there are now. For that, the equipment manufacturer, who also takes out a cheap loan, should, consequently, hire new employees. What does this lead to? This leads to the same rise in prices for equipment and delays in its delivery, so the economy as a whole will not produce any more lathes, machines, or facilities. However, it will cost customers a lot of money, because the equipment will become more expensive, which is what we are observing now. If you look at companies’ reporting, you will see that it is not so much loan servicing costs that are rising, but rather the costs of components, raw materials, and equipment, as well as labour costs.
The third option, which is often suggested, is to try to buy imported equipment that is more efficient. Except that we can only buy as much imported equipment as our exports, or the amount of dollars received from exports, allow us to. Again, companies surely can compete for this amount of dollars, offering more rubles in exchange. This will weaken the exchange rate, thus creating the same proinflationary effect. That is, your ability to purchase equipment, the cost of which is measured in dollars, is limited by your export capacity.
That is why, with a shortage of physical resources as severe as it is now, cheap financing can only result in even stronger competition for these resources between companies, entailing rising costs for them and, consequently, higher prices for final products, thus creating an inflationary spiral.
Therefore, certain solutions that seem simple from the perspective of a single enterprise lead to the opposite results within the economy as a whole, and this should by no means be allowed.
Surely, high inflation is even beneficial in certain ways and resolves all problems for monopoly companies in those industries where demand is inelastic. These companies can easily increase prices as people will buy their products anyway. Any costs they incur they can pass through to prices, and households will pay for it. The result will only be the development of these companies, whose profits will grow at the expense of households’ incomes.
This is why the Central Bank should be independent – it must serve the interests of households and businesses by ensuring price stability.
By the way, another interesting fact is that we have recently analysed the impact of interest payments on the economy of companies by reviewing data from around 300,000 companies, if I recall correctly. What do these data show? I assume we are going to publish them in the near future (the paper has been published – ed.). Companies who account for one-third of the total cost of sales in Russia have no interest expenses as they finance their development through their equity, efficiency, and good returns on capital. They are indeed developing. These are mostly companies that are managed effectively. Obviously, in the environment of structural changes that we are living in, it is these companies that should get a bigger share of the market, rather than those who have taken out loans that do not match their capacities.
Replying to your question about the level of the key rate now and in early 2022, I would like to remind you that we raised the key rate to 20% in 2022 to mitigate the risks to financial stability. It was not so much an anti-inflation measure as a measure aimed at preventing the outflow of funds from banks, etc. Therefore, when the objective of ensuring financial stability was achieved, we cut the key rate to 7.5% rather quickly, which propped up the economy. Now, the situation is different, and we are raising the key rate in response to accelerating inflation and increasing inflationary risks.
QUESTION from Elakhovsky (YouTube channel):
Apart from raising the key rate, what other mechanisms could be used by the Bank of Russia to curb inflation? Another question is: do we find ourselves in a situation where the Bank of Russia seems to be unable to restrain inflation without collateral damage to the economy on its own, that is, without significant tangible support from the Government?
Bank deposits are currently growing at a rapid pace, giving rise to two common questions. How much does this situation jeopardise the stability of the banking system? Raising deposits at 20%, banks need to issue a comparable volume of loans at over 20%, whereas the Bank of Russia is striving to reduce lending. Is there a threat that deposits accumulated by households will fuel inflation later on, once the Bank of Russia starts lowering the key rate and this money can be used for consumption?
ELVIRA NABIULLINA:
As to the first question about the Central Bank’s and Government’s joint efforts to reduce inflation, in this respect, I feel like we share an opinion with the Government on the fact that both measures taken by the Central Bank and those taken by the Government affect inflation, because inflation is about the balance between the growth of supply and the growth of demand. We, as the Central Bank, have an influence over demand on our part. Demand is also affected by fiscal policy, which is why responsible fiscal policy and compliance with the fiscal rule are very important factors that will reduce inflation and bring it down to the target.
However, the Government also has tools that affect supply at its disposal. It is very important for all of us, I think, to eliminate supply bottlenecks related to labour shortages, infrastructure, fostering labour productivity, and investing in its growth. To achieve this, everyone has to do their job according to their mandate and the tools they have. We do interact with the Government on a wide range of topics, but each of us makes decisions independently in our own fields of work.
As for the impact of the rapid growth of bank deposits and deposit interest rates on financial stability and future risks, we do not believe this carries any risks to banks’ stability. Banks are well aware that if deposits become more expensive, they can only offer loans at higher rates, and, consequently, the demand for these loans will decrease, which is exactly what should happen in terms of the transmission mechanism and the deceleration of inflation.
As for this widespread concern (and it is not the first time we have heard about it) that banks are now accumulating a certain overhang of deposits at high rates, which will then spill over to the consumer market at once, there is absolutely no reason to be concerned about it. When the time comes, we will cut the key rate in such a way so as to ensure that both consumer and investment activity increase commensurately with the capacities to expand output.
Besides, as I have already said, deposits serve as a source of loan financing, and this should also be taken into consideration.
ALEXEY ZABOTKIN:
I think Mr Elakhovsky was wondering about one more thing, which he also mentioned in his question, that if a bank pays interest on a deposit at a rate of 20%, then lending should also grow rather quickly. Here, I would like to emphasise the point that was made at the last session, which, I believe, Ms Nabiullina has also addressed today. Banks pay interest on deposits at the expense of the interest they receive on loans, so it is not new money. It is money that has been debited from the accounts of those who borrowed it from banks and credited to the accounts of those who keep money on bank deposits. The money supply does not increase as a result of these two transactions – receiving interest on loans and paying interest on deposits. The money supply increases only through lending. Indeed, tight monetary policy will push down the credit growth rates, thus also causing the growth of deposits to decelerate.
QUESTION from Reuters:
The Central Bank has started to reduce the limit on FX swaps. Does this mean that the situation with yuan liquidity has normalised or is it vice versa?
The second question is whether the Central Bank believes there are recession risks in the civilian sectors of the economy due to the key rate hike?
Now, the third question, the last one: is there any chance at all that the 21% key rate will be the peak of the current cycle?
ELVIRA NABIULLINA:
I will start with the last question. It is difficult for us to assess which level will be the peak, but I will emphasise once again that we will make decisions on raising the key rate in order to bring inflation back to the target as necessary. I would like to reiterate the Bank of Russia’s signal: we admit that there is a possibility of a key rate increase at the next meeting.
As for recession risks, recession is basically about the economy as a whole, not about individual sectors, and we forecast that GDP will grow. That is why we have not factored recession risks for the economy as a whole into our forecast.
As for the lowering of FX swap limits, yes, we believe it is largely a reflection of the fact that the situation has normalised. Our swaps were previously often used as a funding tool for foreign currency loans, while the external yuan markets also became limited, and banks were issuing loans using short-term funds they had raised, among other things. However, since then, banks have already ‘fixed’ this, to a great extent, and, indeed, the situation with FX swaps has normalised in many respects.
QUESTION from Bloomberg:
I would like to ask you a question about the additional ₽1.5 trillion, which has already been repeatedly raised here. To what extent were these new expenditures factored into your September calculations and forecasts? And to what extent will they affect the key rate path for the next 12 months? If not for the ₽1.5 trillion, might the key rate be 20% now rather than 21%?
The second question is about the 23% key rate in December. What has to happen by December for it to reach 23%?
The third question is about the USA already promising to use frozen Russian assets. Previously, you said the Bank of Russia would take measures in response. How will you respond? Perhaps you can already say what measures will be taken and when?
ELVIRA NABIULLINA:
With respect to considering the additional ₽1.5 trillion when making our decision in September, by that time, the decision had not yet been made, and there were no specific figures, so we did not take it into account in September. Nevertheless, once again, we mentioned it in the risks to the baseline scenario – we wrote about it and realised that there was such a probability, but we can only take such a decision into account after it has been made and its scale is known.
This is indeed one of the factors influencing next year’s key rate path. Moreover, the additional funds in the budget will have an impact on this year’s inflation. We believe that it has already partially translated into the higher inflation that we are observing now and has led to the fact that this year’s inflation will be
Next year, in accordance with the parameters announced, fiscal policy is expected to have a disinflationary effect, and we are taking this into account. However, I would like to repeat that it is impossible to isolate just one factor when making a decision on the key rate. We have to consider the cumulative influence of many factors. That is why it is also impossible to answer the question ‘What would the key rate be if not for the ₽1.5 trillion?’. The cumulative impact of all factors is very important to us. Many of the proinflationary risks that we warned about have materialised, and we can see that.
As for the potential key rate hike, it is probably theoretically impossible for us to discuss the future decision of the Board of Directors now, but we have repeatedly indicated certain important parameters that we take into account when deciding on raising the key rate. These include persistent inflation, inflationary pressures, inflation expectations, the output gap in general, and the imbalance between supply and demand. Therefore, our analysis of the situation will be comprehensive.
As for the response measures, I have said many times that they are being discussed at the top level. I guess a certain decision will be made in this regard.
QUESTION from Furydrops (weblog):
The first question concerns other tools that the Bank of Russia has at its disposal. Why does it raise the key rate instead of, for example, significantly tightening various other macroprudential requirements? Perhaps they could help achieve better results. Is it that you see risks associated with these measures that are not obvious to an average person?
And a second question, if I may. It is well known that efficient stabilisation monetary policy rarely coexists with expansionary fiscal policy. To what extent do you consider the budget, or rather, the draft law on the budget for
ELVIRA NABIULLINA:
Our main tool is the key rate, and I will stand by that. It is counterproductive to use macroprudential measures to combat inflation. The inflation targeting regime is also, to a large extent, an expectations management regime. When we start using a tool designed for other purposes to combat inflation, it undermines the clarity of communication. What we will get is completely unanchored inflation expectations, without achieving the needed effect.
Having said that, however, I cannot fail to mention another thing: we use the tool of macroprudential regulation to limit the accumulation of risks in the banking system. Banks may be tempted to issue profitable but high-risk loans to highly leveraged borrowers or loans with low down payments in the case of mortgages, etc. Without any doubt, this may have an impact on the overall credit growth rate as well. And we do take that into account. Nevertheless, the goal is to limit the risks, with an impact on the credit growth rate being a possible consequence, which is factored in too.
This is how we will continue to act. By the way, we are also concerned about the accumulation of risks in corporate lending. Indeed, there are no macroprudential requirements in that segment, and we have now returned to this topic and are discussing whether to introduce these requirements or, perhaps, to clarify the prudential regulation so that the risks associated with the excessive debt accumulation by certain companies are taken into consideration. We are planning to change the regulation here. Anyway, this is about addressing risks, which may also have an indirect impact on the credit growth rate, which we will take into account.
ALEXEY ZABOTKIN:
Another important aspect that we always mention is that macroprudential measures only affect the credit channel and only certain segments of credit to which they apply. Strictly speaking, nothing prevents banks from reallocating their lending from a segment that has been subjected to macroprudential tightening to other segments if they see creditworthy and attractive borrowers there.
Nevertheless, another very important consideration is that macroprudential measures do not affect the deposit channel at all, i.e. they cannot influence households’ propensity to save in any way. It is exclusively the ratio of the deposit rate (which is directly affected only by our key rate) to inflation expectations that influences households’ savings behaviour. If inflation expectations are high, and we try to respond to them by implementing other measures without using the key rate, we will end up with a spiral of roaring demand when people will simply try to insure themselves against inflation losses by buying everything from buckwheat to flats.
ELVIRA NABIULLINA:
As regards the interaction between fiscal and monetary policy. Certainly, during the period of disinflation in
ALEXEY ZABOTKIN:
I would like to make a brief point on the US experience in the early 1980s. Do not get the wrong impression and think that if they had such a large budget deficit and the Fed funds rate at 19% was just enough for them to combat inflation, which was about as strong as we now have in Russia, then we can do the same. A very important thing to take into account is that the volume of subsidised loans was not (and is still not) as huge as it is now in the Russian economy.
QUESTION from Izvestia:
The first question is about Sergey Shvetsov’s proposal to use the funds held in
I also have a second question. Mr Peskov said you did not like the BRICS banknote. Is it because of its design or do you not like the very concept? I understand that this is not going to happen today or tomorrow but is it possible that it will be used in the future?
ELVIRA NABIULLINA:
As regards using
Indeed, together with the Ministry of Finance, we believe that we need to create an environment conducive to investment by non-residents: if they have continued to invest in the Russian economy after the beginning of 2022, we have to give them an opportunity to repatriate the returns on their investments and so on. Therefore, I do not really support the proposal to use
As for the BRICS, our technological level really is a bit too advanced to use cash as a form of a single currency. If we were to talk about it, I would suggest thinking in terms of digital financial assets, etc.
Occasionally, there are proposals to accelerate the development of some kind of a single currency, but it is a very challenging process. If you take a look at single currencies of different countries and their history, you will see how high the levels of harmonisation and integration must be in many areas of the economy and finance. Nevertheless, we are surely discussing the development of settlements in national currencies and the use of various new technological solutions and platforms designed to facilitate trade and investment between our countries.
QUESTION from Krasny Sever newspaper:
The Bank of Russia has always rated the risks of the broad accessibility of the subsidised mortgage programmes as high. Now that a part of them has been cancelled, while the terms of the other part have been revised, the demand for new housing has slumped.
Furthermore, regional developers note that they have basically put their new projects on hold and are only working on the projects they launched earlier. Do you have any apprehensions that the construction industry will have a hard time recovering in the near future? Finally, which conditions have to be met, according to the Bank of Russia’s estimate, for housing to become more affordable and for housing prices to start declining?
ELVIRA NABIULLINA:
You are right in saying that it is housing that should become more affordable, rather than mortgages. I cannot stress it enough that they are indeed interrelated but are not one and the same thing. If flats stay expensive, housing will not be affordable even with 0% mortgages, as your wages are growing slower than housing prices.
And, yes, the demand for housing will become more balanced due to the termination of the large-scale subsidised mortgage programme, as it was before the programme was launched. What now seems like a sharp decrease both in sales and mortgage loans is basically a return to a more reasonable level of housing demand.
The mortgage lending growth is slowing down, although it had already reached a very high rate before it started to decelerate. I would like to remind you that the growth rate was over 30%. That cannot continue for long, so the construction industry should not expect the growth rate to always equal 30%, and we warned them in advance that it was impossible. We expect the mortgage portfolio growth to be within the range of
I have also mentioned housing affordability. I would like to remind you that housing prices have almost doubled over the four years of the subsidised mortgage programme, significantly outpacing the growth of both wages and inflation. The main way to make housing more affordable is to have growth of incomes outstripping that of housing prices, along with moderate market rates, which will only be possible provided inflation is low enough.
We are now observing that households have started to buy housing using their savings. This is evident from the funds deposited to escrow accounts. Earlier, loans accounted for a large part of the funds credited to these accounts, while now 50% of them are people’s own funds.
As inflation decelerates, the interest rates on mortgages will start going down again. In this regard, our task is to ensure that mortgage rates are moderate and that mortgages are affordable even without subsidised programmes.
For developers, it will mean more moderate consumer activity. Nevertheless, it seems to me that our developers have shown that they are capable of adapting quickly over recent years. First of all, they have accumulated substantial safety cushions. I will give you a few figures as an example to prove that they do have certain buffers, or safety cushions. For the past year, the construction sector’s overall profit was almost five times higher than it was in 2019 before the introduction of the large-scale subsidised mortgage programme, whereas there was only a twofold increase in profit in the economy as a whole over the same period. So, we will certainly see a cooldown in economic activity following this four-year boom, but I believe construction companies will cope with it.
QUESTION from Bitkogan project:
This is the second consecutive meeting that the Bank of Russia has raised the key rate (as though it is always a partial increase) and given a tough signal for the future. The question is: why not do it in one go? Especially now that businessmen are often taking out loans more actively in anticipation of a further increase in the key rate.
ELVIRA NABIULLINA:
I would not call it a partial increase, but rather a decision that takes into account the current situation. It is not predetermined that we will raise the key rate. We admit that it is indeed possible, but if we see underlying inflation decelerating notably and steadily, we will adjust our forecast and might not even need to increase the key rate. It would be wrong to raise the key rate with a margin in advance, especially when there is uncertainty.
We need to assess the effects of the earlier key rate decisions as they occur with a time lag. We look at the transmission mechanism because it takes several quarters for our decisions to fully affect inflation, although the influence might begin to manifest itself in early periods too.
As for the possible demand for loans, I feel like if we talk about corporate loans, for example, companies have to assess risks on their own. They have to decide independently whether they are ready to take out loans, whether they expect the key rate to be raised, or when they expect it to be reduced. If it is a long-term loan, they should rather asses their medium-term prospects. Honestly speaking, I do not see it as a significant effect or factor. We might see it partially materialising when demand shifts to the left and companies take out loans faster in anticipation of a key rate rise.
ALEXEY ZABOTKIN:
Overall, we do not share the common opinion that companies raise more loans if they expect the key rate to be increased. It is not backed by the data available. How could data be used to test this hypothesis? If it were true, companies would actively take out loans at fixed interest rates because they could save on interest payments.
If the interest rate on a loan is fixed and a company expects lending rates to be even higher in the future, it will raise the loan now. Therefore, if companies do not demonstrate strong demand for loans at fixed interest rates, whether these are loans for five years or for six months, then it is actually rather difficult to say that they are motivated by the expected key rate increase. It is unreasonable to take out variable rate loans in advance as their rates will be raised too, and the cost will be higher.
ELVIRA NABIULLINA:
Due to the fact that most loans are now granted at variable interest rates, it is indeed useless to take them out in advance.
QUESTION from Rossiyskaya Gazeta:
As a follow-up to the question about affordable housing, I would like to ask why the gap between new and existing housing prices has not become any narrower following the termination of the subsidised mortgage programme? Will it stay around 50% for good? Or do we have to wait a little bit longer?
And one more question, if I may. Could you please comment on the statement by Alexey Moiseev, Deputy Finance Minister, about the end of the key rate cut cycle in 2030?
ELVIRA NABIULLINA:
I would like to ask Mr Zabotkin to answer this question. We forecast the neutral rate of interest to be within the range of
ALEXEY ZABOTKIN:
Let me explain. Alexey Moiseev could probably comment on his own statement better than we can, but he did not say that the key rate cut cycle would be extended until 2030. He said that the process of monetary policy easing would be completed by 2030. This does not mean that it will be prolonged until 2030, but rather that it will be completed within the timeframe given.
Ms Nabiullina has said that if inflation returns back to the target by 2027, then the key rate will be brought back to its neutral level, accordingly.
ELVIRA NABIULLINA:
Talking about the termination of the subsidised mortgage programme, I would like to say that we are seeing its first effects in terms of the overall growth rates of mortgage lending as they are becoming more balanced. What is of real concern to us is the gap between new and existing housing prices, and we believe it is one of the consequences of the large-scale subsidised mortgage programme that has been in place for so long.
First of all, we do think that little time has passed, as in recent months, transactions were mostly conducted according to the arrangements made in the previous months. Mortgage loans are not granted in a day. This is one of the factors.
The second factor is the financial safety cushion accumulated by the construction sector that I have already mentioned. Owing to this cushion, some developers are able to maintain prices at the current level, maybe even through reducing supply, instead of lowering them.
The third factor that we are, regrettably, observing is the proliferation of sophisticated and obscure schemes that result in higher housing prices. Unfortunately, these schemes persist and change. We are very much counting on the mortgage standard that the banking community has agreed upon and on its efficiency.
However, if this standard does not work – and we are already treating it as a threat – if banks do not adhere to the standard they have agreed to, it is likely that we will either incorporate it in a law or discourage banks by applying various kinds of higher deductions or loan loss provisions that we are discussing currently. If a loan is issued in violation of the standard, it means that a higher loan loss provision rate will apply to make it unprofitable for banks. Anyway, this is one of the factors too.
Preliminary high-frequency data show that prices have most likely started to decline in the new housing market both across Russia as a whole and in certain Russian regions. Perhaps, if the trend continues, it will lead to a reduction in the gap that you have mentioned.
QUESTION from Respublika Tatarstan newspaper:
The economy of a number of Russian regions, including Tatarstan, is mostly dependent on large industrial enterprises. In case of a long period of high interest rates, are there any risks that the cooldown in industrial production and import substitution will be too strong and that the situation with supply in the market will deteriorate?
ELVIRA NABIULLINA:
We assume that the economy will continue to grow, albeit at a more moderate pace. Its structural transformation will continue, including in terms of import substitution, automation, and higher labour productivity. By the way, we see that labour productivity is now higher than it was before the pandemic. Hopefully, all investments that have been made will pay off in higher labour productivity in the economy as a whole.
Nevertheless, as the structural transformation continues, it will provide more growth opportunities for certain industries. For example, if companies occupy the niches that were previously occupied by foreign businesses, they will grow at a double-digit pace.
If you look at the sectoral composition of the economic growth, you will see that there are indeed great differences between industries, and companies in the same industry are also growing at different rates. Certainly, there will be companies that will face a contraction in the demand for their products. It is inevitable considering the structural transformation as well as the movement of resources to those sectors that are developing at an accelerated pace. Those companies will have to either explore new opportunities, new niches, and new products or develop new business processes and improve labour productivity. As companies say, there is a lot of room for growth, sometimes not even entailing large investments. Business processes and their improvement may boost labour productivity too. Therefore, they will have to either search for new niches or scale down production. This is an inevitable consequence of the structural transformation of the economy.
QUESTION from RBC:
There is a common view that the key rate cannot be raised indefinitely to fight inflation. There is a certain point at which further tightening of monetary policy will no longer work if fiscal policy is not accordingly tight. Do you think that there is such a point, a maximum key rate level, after which it will stop working? Which level would it be – 25% or 30%?
ELVIRA NABIULLINA:
In my opinion, there is no such thing, so there is no use in discussing a hypothetical maximum rate.
As for the interaction with fiscal policy, I have already spoken on this topic. The normalisation of fiscal policy, which, by the way, will take place next year and, hopefully, in line with the decisions announced, is another contribution to disinflation. However, even amid expansionary fiscal policy or the easing of fiscal policy, the goal of reducing inflation could be achieved using monetary policy tools and the inflation targeting regime.
QUESTION from Nezavisimaya Gazeta:
I would like to ask you to elaborate a little on the recent argument made by Mr Zabotkin in one of his interviews that in the current economic environment, a high key rate clears the economy of inefficient companies and redistributes scarce resources in favour of those sectors that are more in demand and prioritised. The question is: can you already see that the economy is being cleared of inefficient companies? If not, then when will this process start, and which industries will be affected first? Does it mean that certain companies will go bankrupt?
ELVIRA NABIULLINA:
With respect to the redistribution of resources between sectors in favour of more efficient ones, the result will be visible in further labour productivity growth. I have just said that we already see that, for example, the rate of labour productivity growth is higher this year than it was last year (around 4% in 2024 H1) and higher than it was before the pandemic.
The second thing I would like to point out is that a redistribution of resources does not always entail a wave of bankruptcies. If companies do not see any prospects and make timely decisions, e.g. they sell assets to those who can use and manage them more efficiently, a wave of bankruptcies can be avoided.
ALEXEY ZABOTKIN:
In fact, a redistribution of resources in favour of more efficient companies with lower or no debt burden amid tight monetary policy is a natural process, which is related to a redistribution of market shares. It by no means suggests that those who reduce their market share are moving towards liquidating their business. It is just a redistribution of market shares.
There are also enterprises that scale down their business or sell their assets to the companies that have disposable capital or are less dependent on debt financing and, accordingly, are capable of using only equity financing for their development. This is a very multifaceted process that takes place in every economy where all resources are already being used. For the economy to keep growing, all of us have to be better and more productive in doing our jobs at our workplaces. Among other things, this actually largely depends on the way production processes are organised within a company or an institution you work at. Accordingly, all labour resources are redistributed there, and financial resources go to those who can really pay a higher yield on these investments.
ELVIRA NABIULLINA:
Here, it is very important not to discourage this redistribution by providing too much support to the companies that do not prove to be efficient. This process has to take place, and if the redistribution is efficient enough, it will ensure a market where supply keeps up with demand.
Certainly, the state also has responsibilities related to infrastructure, supporting new technologies associated with high risks, and so on. However, it is important to refrain from propping up those enterprises and production facilities that do not adapt.
ALEXEY ZABOTKIN:
This is actually the first time that we find ourselves in this kind of a cyclically overheated economy. All previous periods of high interest rates were caused by external shocks and economic downturns. That is what we saw happening in
Therefore, it is surely likely that businesses tend to think that because demand was supported in the past to offset the effects of these shocks and the high interest rates associated with risks to financial stability, then the same should be done now. However, the economy is now at a diametrically opposite point in terms of its sustainable growth path as compared to the previous episodes when anti-crisis measures that everyone is used to were applied. It is simply inadvisable to use them now.
ELVIRA NABIULLINA:
Thank you for your questions.