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Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 19 June 2020

19 June 2020
Speech

Today, the Board of Directors made the decision to reduce the key rate by 100 bp down to 4.50% per annum.

One percentage point is much more than the pace we have been following in the recent few years. Although this decision was expected by both analysts and the financial market, I believe it is reasonable to explain why the current situation demands exactly this pace of reduction.

Already in April, the drastic changes in the economic situation evidenced that disinflationary factors would be prevailing over the medium-term horizon. The conditions required a shift towards accommodative monetary policy. Therefore, we then made the decision to cut the key rate by 0.5 percentage points.

What has happened over one and a half months after the previous key rate decision, and what are the grounds for reducing the key rate by another percentage point now?

First, the economic situation is unfolding in such a way that the disinflationary effect will be even more significant than we assumed in April. The restrictions have been in place for a longer period and are being eased on a step-by-step basis. Moreover, the maximum reduction in oil production within the OPEC+ deal has been extended for July, which will somewhat strengthen both primary and secondary effects. This implies that demand in the second quarter will presumably decline slightly deeper and will be recovering over a longer period of time than we expected one and a half months ago.

Second, the effect of short-term proinflationary factors, that we considered when making our decision in April, has been exhausted. Monthly inflation in May substantially slowed down compared to April. At present, seasonally adjusted price growth in annualised terms is close to or even slightly beneath 4%. Inflation expectations lowered after temporarily picking up in March-April.

Third, monetary conditions have started to ease in May-June after the tightening in March—April, which is proven by both the indicators of financial markets and business surveys. This has been driven by the governmental programme supporting borrowers, including both pandemic-affected enterprises and households. However, given the scale of disinflationary trends, the situation requires a considerable additional easing of monetary conditions.

Fourth, risks to financial stability have significantly decreased. The market situation has normalised; volatility has diminished considerably; risk premiums have lessened; and oil prices have recovered to USD 40 per barrel.

Hence, the developments over the last one and a half months fully substantiate the existing potential for a notable reduction in the key rate. And we are now using this potential. At our upcoming meetings we will consider the necessity of further key rate reduction.

Now regarding the factors that may be behind such a decision and our current expectations.

Up-to-date indicators show the economic activity has partially revived, being driven by the progressive easing of the restrictions in the majority of Russian regions. However, it will take time to restore production and logistics chains. The past period might have altered businesses’ investment and production plans, and consumers’ preferences. Households will possibly become more cautious about their expenses, opting to save money and put off large or discretionary purchases. Eventually, all this may impact potential economic growth rates and the pace of its recovery. Right now, it is hard to estimate this influence on the potential. A lot will depend on the recovery pace of the global economy, the situation with the pandemic, the cancellation of the anti-coronavirus restrictions, and businesses’ and households’ sentiment and expectations.

The current economic situation has required additional government policy measures, specifically fiscal measures to support businesses and households. The planned scope of fiscal measures is expanding. At the present moment, the Government is preparing a recovery plan for the national economy. The plan will seek both to overcome the economic consequences of the coronavirus and to restore and, ultimately, boost the economic potential. We are involved in the discussions of this plan and will take it into consideration when pursuing our monetary policy.

As noted earlier, main negative spillovers of the restrictions will affect the second quarter, which will be followed by recovery in the third and fourth quarters. The full reversal of GDP to the 2019 levels is likely to occur only in the first half of 2022. With that, the positive effect of the monetary policy easing will mostly manifest itself in 2021. It is conditioned not solely on the standard lags of the monetary policy mechanism. This is linked to elevated credit risks which are raising the cost of borrowing. This is why the material reduction of the key rate is needed to level out these effects and ensure a noticeable easing of monetary conditions for the economy.

As for external conditions, they will remain complicated. Although strong measures taken by governments and central banks have ensured a rapid stabilisation of financial markets, fundamental indicators of the global economy continue to be weak. The pandemic spread has not been brought under control by all countries, and restrictions are mainly preserved, which does not add optimism. Last week, the World Bank and the OECD revised their 2020 global economic outlook downwards. Additionally, geopolitical risks persist, thereby also dragging heavily on world economic growth. This is predominantly true for the restrictions in the trade relations between major economies.

The low growth rates of the global economy is the economic reality which we will have to face for a long time ahead. For Russia, this means a limited opportunity to expand its exports, including due to our commitments under the OPEC+ deal.

In these conditions, the balance of risks remains skewed towards disinflationary factors. They are mainly linked to the uncertainty around the further development of the pandemic in Russia and abroad, and the pace of economic recovery as the restrictions are eased.

Much will depend on the medium-term fiscal policy, as well as on support measures being adopted now, and also on further fiscal consolidation plans, and, finally, on the speed and time horizon of the fiscal consolidation.

Our current policy seeks to create accommodative monetary conditions for the economy amid low inflationary pressure and prevailing disinflationary risks. As the economy returns to its potential, conditions will become more conducive for a return to neutral monetary policy. The concrete timeframe for this to happen will depend on the totality of all factors, both domestic and external ones. They all have been mentioned above. Speaking about our monetary policy, whether it is tight, as it used to be, or accommodative, as it is now, its ultimate goal has always been to achieve the Bank of Russia’s target — the stabilisation of inflation close to 4%.

Q&A for the Media

QUESTION from Rossiyskaya Gazeta:

Given that disinflationary risks are prevailing, do you consider it possible that at one of the upcoming meetings the Bank of Russia may once again reduce the key rate as significantly as today, or will the Bank of Russia rather return to a more typical pace, e.g. 0.25 percentage points, if there is a need to further cut the key rate?

ELVIRA NABIULLINA:

We will continue to assess whether it is reasonable to further ease our monetary policy and decrease the key rate. However, as you know, our approach basically implies a gradual and prudent pace enabling us to monitor all effects and properly analyse all incoming information. Therefore, we definitely do not consider that today’s reduction is a normal pace. Everything will depend on future developments. Of course, we do not perceive this as a switch to a new decision-making standard.

QUESTION from Bloomberg:

Central banks worldwide, namely the US Fed, are giving signals that near-zero rates will remain for a long period of time, specifically until the end of 2022 in the USA. Does this imply that low interest rates in Russia will also stay for a long time? Anyway, are you going to revise the neutral rate range in the near future and what are its possible limits?

ELVIRA NABIULLINA:

Monetary policies of major economies’ central banks are really a factor we take into account when making our decisions. However, this is only one of the factors, while we consider the totality of them, including other external factors, specifically the situation in global commodity and financial markets, and domestic factors. Nonetheless, all else being equal, monetary easing by both the US Fed and the ECB certainly provides more room for easing our monetary policy, but again only if all other conditions are equal.

As regards the neutral rate, our assessment of it is really one of the parameters influencing our forecast. Actually, the position of the key rate and the position of interest rates in the economy in relation to the neutral rate determine the stance of our monetary policy, whether it is tight or accommodative. Therefore, this is an essential parameter, although it cannot be tracked. I am constantly emphasising that these assessments are very conditional and unobservable. Of course, it would not be useful to revise the Bank of Russia’s view on the neutral rate too often. Last time, we were discoursing upon the neutral rate in the Monetary Policy Guidelines that specifically stipulate our fundamental view, and the conditions and principles for implementing monetary policy. We are also going to discuss this issue this year, with probably only one alteration — the Monetary Policy Guidelines to be presented in September will comprise the forecast we prepare in July. Hence, we will most probably cover this topic in our July’s Monetary Policy Report.

However, today I can say that the past year has added a few more reasons for us to adjust our opinion on the neutral rate. We will be accumulating data to update our viewpoint.  Changes are possible, but they are not expected to be drastic. I can say, for instance, that at the moment the value below 5% is rather beyond the range we are considering.

QUESTION from TASS Agency:

A while ago, Sberbank’s strategist forecast that the key rate would be cut to 4% by the end of September. Do you believe such a reduction in the key rate is possible by this time?

ELVIRA NABIULLINA:

In this regard, I can reaffirm that the key rate level and the path of our monetary policy will be governed by the objective to drive inflation to the 4% target and stabilise it at this level, and will rely on the analysis of the factors that will be relevant at the moment of decision-making and on our adjusted forecast. Therefore, I can give you only this answer about the underlying principles of our decisions.

QUESTION from Kommersant:

What is your opinion about how the Bank of Russia’s key rate decision, which is rather significant, may influence the borrowing programme of the Ministry of Finance for this year and 2021? It is obvious that yields on new public debt may also be expected to decline. How would you estimate the extent of this decrease? Will there be any new limits of borrowings set for the Ministry of Finance?

ELVIRA NABIULLINA:

I would like to emphasise once again that we do see room for increasing public debt which may be employed, and the Ministry of Finance is actually using this potential. We provide no forecasts on asset prices, but it is possible to see that expectations regarding our today’s key rate decision have already been partially included in market expectations. Therefore, we do not anticipate any abrupt changes in this regard. Overall, we believe that the Ministry of Finance will be able to implement its scheduled public borrowing programme without any complications.

QUESTION from Reuters:

A number of analysts assume that today’s decision may close the cycle of monetary policy easing. Is this true?

ELVIRA NABIULLINA:

We are observing the impact of material disinflationary factors and taking them into account, yet the situation may certainly be changing. We will adjust our estimates and make our decisions at every meeting of the Board of Directors depending on the actual situation. I would like to stress once again that we are going to assess the necessity for further easing of monetary policy based on incoming new data and our adjusted forecast. I would like to remind you that the next meeting will be a core one, and we will be adjusting our overall forecast.

QUESTION from Interfax:

What is your opinion about the possibility of engaging banks in the process of rescuing large public companies? One of the examples is the information that VTB Bank may allocate funds to increase Aeroflot’s authorised capital. Does the Bank of Russia see any risks that banks will be accruing non-core assets during this crisis, just as over the period of the 2008–2009 crisis when they added transport and development assets onto their balance sheets. Are there any risks that such assets will be accumulating?

ELVIRA NABIULLINA:

Of course, today’s situation is affecting the quality of assets, and we are well aware of this since this is typical of such conditions. This time, we have implemented sufficiently extensive and large-scale measures to support borrowers in order to prevent loans granted to businesses, especially of the most affected industries, from turning into non-performing loans and to help borrowers recover their creditworthiness. Hence, we do not think that bad debt accumulation may become a mass-scale, or system-level problem. However, a certain increase in overdue debt and bad assets is inevitable, and this will most probably become apparent at the end of this year — in early 2021. Of course, banks, and not only majors, but all banks want their borrowers to maintain their creditworthiness, taking part in various loan restructuring programmes. In a number of cases, debt-to-equity conversion may be reasonable (depending on a particular situation), including in order to reduce payment-to-income ratios for companies with excessive credit exposure and to give them more opportunities for development. This is absolutely normal, and this method is being applied, but every such decision should be made with account of specific circumstances.

QUESTION from RBC:

In its press release, the Bank of Russia publishes that a GDP decrease in the second quarter may be more significant than was anticipated. What are possible figures in annual terms? Can this decline exceed 10%?

ELVIRA NABIULLINA:

That is true; currently, we estimate that in the second quarter GDP may shrink slightly more than we expected, and we forecast a decrease of approximately 8%. The reason for this is that the restrictions were in place for a longer period of time and that the recovery will be progressive. However, we definitely do not expect that GDP may decline by over 10%.

QUESTION from Interfax:

Do the Bank of Russia’s expectations regarding fiscal policy factor in a possible increase in the personal income tax rate for wealthy individuals? What is the level of this discussion at the moment? Is the Bank of Russia engaged in this discourse? What would be your perception of such potential rise in the personal income tax? The second question is about the inflation forecast for this year: it ranges from 3.8% to 4.8%, but given all the disinflationary factors you have been speaking about, including today, isn’t this forecast slightly too high? How do you estimate a possible inflation level this year?

ELVIRA NABIULLINA:

As regards fiscal policy and various decisions on incomes, these are factors that are definitely influencing our monetary policy and our decisions. However, at the moment our forecast does not factor in a change in the personal income tax rate, and we are not taking part in the discussion of this issue.

As to the inflation forecast, we presented our most recent official forecast in April. Our estimate of inflation for the year-end is 3.8–4.8%, which is a rather broad range, given all the circumstances and the uncertainty of multiple factors affecting inflation. Currently, we anticipate that inflation will most likely trend towards the lower bound of this range. We will provide our adjusted estimate in July, at our next core meeting.

QUESTION from Russia 24 TV channel:

At one of your previous press conferences, you said that there was no need in negative interest rates. Today, there are multiple interpretations of this argument, e.g., that the lower bound of the key rate is 4%. There is a dispute over which inflation should be subtracted from the nominal interest rate, specifically whether this should be inflation for the next 12 months or current seasonally adjusted monthly inflation. This matters since current inflation may be slowing down already and it is now close to 3%, as we can see.  Could you please clarify your approach to the assessment of the effective interest rate? Which type of inflation do you consider it correct to subtract from which rate?

ELVIRA NABIULLINA:

That is true, when we are speaking of current inflation, for instance, we imply inflation for the past 12 months. When making their decisions, both businesses and households tend to rely on their expectations, that is, on future inflation. Therefore, I believe it is appropriate to determine the effective interest rate based on future inflation.  We are proceeding from our expectations of inflation in the next 12 months, and in this regard we do not anticipate a switch to negative effective rates.

QUESTION from RIA Novosti:

Banks’ profit was record low in May, totalling as little as 0.5 billion rubles. What result do you expect in June? Are there any fears that banks may still end this year in the red?

ELVIRA NABIULLINA:

May’s performance indicators were really among the lowest by profit. June may be a little better (we have not yet received the information). As regards overall expectations for the year, we do not anticipate losses in the banking system in general, and there may be even a small profit, given that banks earned sufficient amounts of profit over the first months of the year and that the economy is gradually recovering. We believe that banks will end this year in the black.

QUESTION from Izvestia:

As the key rate has become so low, deposit rates may substantially decrease beneath 5% per annum already by autumn. Does the regulator see any risk of a deposit outflow for this reason?

ELVIRA NABIULLINA:

That is true; when the key rate goes down, interest rates on deposits and loans adjust. However, effective rates on deposits currently remain positive, and we believe that they will continue to stay positive and will be attractive. Concurrently, short- and long-term interest rates will mostly likely differ since our key rate influences to a greater extent short-term deposit rates, while long-term rates rather depend on yield curves. We expect that long-term deposit rates will be more attractive in terms of interest.

QUESTION from Komsomolskaya Pravda:

Do you think that retail, mortgage and consumer loans may become cheaper following the key rate reduction?

ELVIRA NABIULLINA:

Of course, one of the reasons why we are taking measures to decrease the key rate is to influence monetary factors and price terms. Interest rates may be gradually going down, but with a time lag. Our decisions on monetary policy have a time lag effect. According to our estimate, it takes from three to six quarters, and this will gradually pass through to interest rates. By the way, we can see now that mortgage loans are becoming cheaper, and banks are stating this directly, but in the first place this is certainly being driven by the preferential mortgage lending programmes implemented by the Government. Of course, unsecured lending involves more risks. Therefore, although the key rate is going down, banks’ credit risk assessments are pushing interest rates on unsecured loans upwards.

QUESTION from Financial One:

A while ago, we were witnessing a strange occurrence, specifically negative oil prices. Probably, nothing like that has ever happened before, and hardly anybody was prepared to that in terms of infrastructure. In Chicago, they have managed to arrange things somehow, while other countries, namely India and Russia, missed the moment to respond to the situation adequately, which entailed a lot of controversies among traders, brokers and the Moscow Exchange itself. How should such conflict situations be addressed? What should be done further on, learning from this experience of negative oil prices?

ELVIRA NABIULLINA:

We were really tracking attentively how that situation was unfolding and how the exchange was making decisions under such circumstances. I would like to stress once again that we detected no violations on the part of the exchange. However, there is a potential for improvement, as they say. We are currently devising our recommendations for the exchange and market makers in order to enhance risk management, in the first place, to scrutinise all technological risks, in the second place, and thirdly, to increase the transparency of such transactions, which is primarily related to the derivatives market. Hence, this issue is in the focus of our attention, and we will be acting through recommendations and cooperating with the exchange in order to mitigate risks for market makers, clients, and investors.

QUESTION from TASS Agency:

The press release reads that the Bank of Russia will consider the necessity of a further decrease in the key rate. Does this imply that the regulator may take a timeout at the next meeting of the Board of Directors?

ELVIRA NABIULLINA:

We are really going to consider whether it would be reasonable to reduce the key rate, given the information we will be receiving and the adjusted forecasts. A timeout is totally possible, as well as a decrease in the key rate, and we can give no predictions in this regard now.

QUESTION from Reuters:

We have been observing for nearly three months by now that banks’ deposit portfolios remain almost unchanged, that is, households’ saving activity is moderate, which is related exactly to savings with banks, to deposits. Has the Bank of Russia already analysed this situation? Do you think that the zero growth of bank deposits currently mean that households are consuming the part of their incomes they used to save, or this money is possibly held as cash and invested in the stock market. What is currently happening with the part of income households previously tended to save? Do they now have such funds?

ELVIRA NABIULLINA:

This is a really important question for understanding changes in households’ preferences, including their propensity to save and to consume in these conditions. It is hard to judge relying solely on the information about deposit trends. Our assessment is as follows: individuals tended to stock up with cash, especially at the initial stages when the Government started to implement restrictions; they were withdrawing their deposits and consuming their savings because their incomes were decreasing. As we know, a lot of households are experiencing a reduction in incomes or have lost them. Of course, people have been using their savings under these circumstances. Furthermore, the lockdown caused a shift towards cash payments. This was another reason why individuals were withdrawing their deposits. In our opinion, people are mostly spending their money for essential needs. Today, it is unclear how this situation will be unfolding further on, and I have spoken of this. It is important for us to comprehend how households’ preferences and behaviour will be changing even when their incomes start to bounce back: whether they will be opting to restore their safety cushions for the future, or will be spending their money, including to realise deferred demand for goods and services they were unable to purchase due to the restrictions. Hence, this topic is also in the focus of our attention, and we will be monitoring how the situation will be unfolding and how households’ preferences will be changing. Nonetheless, as regards deposits, they have expanded by 1.4% since early June, despite all the changes, which means that individuals are returning their money into bank accounts.

QUESTION from Bankiros (financial portal, Nizhny Novgorod):

Although the key rate has been cut, banks seem reluctant to lower their interest rates on loans and offer the same credit cards at 24% per annum based on individual calculations. Will there be any regulatory decrease in loan rates following the key rate reduction? Do you anticipate that Russians may discontinue depositing due to ultra-low returns? What problems may arise for banks in this regard?

ELVIRA NABIULLINA:

That is true; generally, banks’ deposit and loan rates do not follow the key rate path immediately. This takes some time. Moreover, interest rates depend on credit risk assessments. Interest rates on mortgage loans are going down, while interest rates in consumer lending may be rising due to an increase in credit risks. We believe it unreasonable to regulate or establish the levels of interest rates through administrative means. They shall be driven by the competition among credit institutions and determined based on economic data. Furthermore, we already have the necessary regulation in place, and I believe it to be sufficient. This is the regulation of excessively high interest rates. We are regulating the effective interest rate, which implies that the EIR may not exceed the average market rate by more than one-third. In addition, we are regularly disclosing the information on these average market values of the EIR.

QUESTION from Bloomberg:

I would like to continue the topic of troubled debts. Do you believe that there may be a comprehensive solution to address this issue? Previously, you said that there was no need to create a bank of bad debts. Nevertheless, can there be developed any comprehensive approach to settle this problem? Moreover, as you have said before, their peak growth might occur at the beginning of the next year, and a number of analysts consider that it would be impossible to address this issue without governmental measures. Is there any mechanism for this purpose that is probably under discussion already? What it may involve?

ELVIRA NABIULLINA:

I reaffirm the opinion I expressed earlier. I do not think it necessary to establish any institute, bank, or fund of troubled debts. The quality of assets may be really deteriorating, and I have certainly spoken of this before. In order to address this, we have launched loan restructuring, in the first place. Secondly, we have permitted banks to recognise their losses as they are detected, spreading them over time. Talking of the system of comprehensive approaches, we believe that our countercyclical policy is exactly what helps absorb losses in challenging periods. This is why we have been accumulating buffers (by the moment, only one buffer for mortgage loans has been released): we have nearly 600 billion rubles for unsecured consumer loans, as well as systemic importance buffers, and others. As these losses arise and are revealed, these buffers may be used, combined with the cancellation of the regulatory relaxations. We are going to implement these measures. I would like to reaffirm that banks have sufficient capital to absorb these losses. In our opinion, banks are capable to address the problem of bad assets owing to these additional measures.

QUESTION from Banki.ru:

The mechanism how the Government will compensate banks for the shortfall in their incomes under the preferential mortgage lending programme implies that compensation amounts will decrease following the key rate reduction. Do you believe it necessary to revise this mechanism and the level of preferential interest rates stipulated by the programmes due to the material reduction in the key rate?

ELVIRA NABIULLINA:

At the moment, I do not think this is needed. If any problems or complications arise, it will be necessary to analyse the market situation. I think that the Bank of Russia will discuss this issue together with the Government. This is a governmental programme. We support it and believe it to be highly requested. Preferential mortgage lending is gaining traction very fast, and currently I can see no problems in this regard. However, if the situation requires any changes, we know that the Government is able to flexibly readjust its programmes, adequately responding to the needs that may arise.

QUESTION from Forbes:

Banks notified the Government in advance that the establishment of maximum acquiring fees as an anti-crisis measure might entail an increase in bank card fees. As a bank client, I am experiencing this already now. My bank has already notified me that it is going to raise my bank card fee. Do you have an understanding how long these acquiring fee thresholds will remain in place? Is it possible that acquiring fees will stay at their current level forever, and, accordingly, bank cards that used to be fee-free will become fee-based?

ELVIRA NABIULLINA:

We have really exercised our right to impose restrictions on acquiring, but they are only applicable to online purchases. This was an appropriate measure since people are staying at home and have to make purchases online. Therefore, we should give them this opportunity. We have approved this decision as a temporary one, and will be monitoring the situation in this area. We will decide whether it is reasonable to maintain these thresholds closer to 30 September. Basically, we certainly hold that the level of acquiring fees and, generally, fees for payments should be determined by the market, provided it is competitive. This is exactly why we are developing the Faster Payments System.

However, given these recent statements, so to say, from banks that they may increase their fees for servicing, card issue, etc., we will certainly be monitoring the situation. Currently, we do not have powers in this regard, but if banks raise their fees, thus increasing the load on bank card users, I assume that we may request the State Duma to provide us proper powers, so as to exercise this authority in extreme cases, e.g., in the situation with acquiring fees, and to regulate the maximum fees.

QUESTION from Reuters:

How is the Bank of Russia estimating the risk of a potential resurgence of the coronavirus? There is an opinion that this may cause a depreciation of the ruble down to 90–100 rubles per US dollar. Can the resurgence entail such an effect?

ELVIRA NABIULLINA:

We have been scrutinising multiple scenarios. We cannot rule out this scenario, but our baseline scenario does not comprise the risks of a coronavirus resurgence. Even if such risks materialise, we believe that economic consequences will be less significant since both economic and financial systems and people’s behaviour have already adjusted to such risks. Nonetheless, we will be making our decision depending on how the situation will be unfolding.

QUESTION from Bloomberg:

Since the beginning of May, the ruble has strengthened by as much as 6.5%. The Russian ruble has been appreciating faster than all other currencies in emerging market economies. What is your opinion about whether a further strengthening of the ruble may affect economic recovery? Secondly, the key rate of 4.5% is a landmark because it has never been that low since its establishment. How do you assess this landmark and how can you characterise it? Does this landmark mean anything to you?

ELVIRA NABIULLINA:

As regards the exchange rate, its strengthening or weakening, and its impact on the economy, we are really continuously debating about this. Exporters often say that the ruble appreciation reduces their export opportunities, while importers, including those interested in purchasing foreign-made equipment, have an opposite opinion. Depending on their leverage ratios, particular enterprises see pros or cons in one or another trend of the exchange rate. In my opinion, the advantage of a market-based floating exchange rate is exactly that it is balancing the interests of all economic agents, reflecting both the current situation and external conditions. I believe that this is exactly the benefit of a floating exchange rate that is changing.

Furthermore, the strengthening of the ruble has a disinflationary effect, which gives us more room for easing our monetary policy.

As to the landmark of 4.5%, this is probably a sort of personal reminiscence: when I was appointed the Bank of Russia Governor in 2013, the key rate equalled 5.5%. Overall sentiment was very positive at that time, with everyone expecting further monetary easing and a reduction in the key rate. A lot has happened since then, and today is exactly the right moment when we may reduce the key rate. However, the level itself, the landmark depends on which key rate we need to ensure price stability, specifically to maintain inflation close to 4%.

QUESTION from Interfax:

You said earlier that you expect an acceleration of inflation to 3.2–3.4% and that annual inflation may speed up. What will be the peak of inflation and in which period of the year will it be reached, in your opinion? Another question: a number of experts believe that it would be more efficient to decrease the key rate not during the time when a range of restrictions still remain in place because the transmission mechanism is not functioning on a full scale. Do you agree with this viewpoint? How much of this pace of 100 basis points will not extend to the economy, in your opinion? By making this decision now, has not the Bank of Russia tied its hands for the future, limiting the potential for further reduction?

ELVIRA NABIULLINA:

Thank you for your questions. Inflation will not speed up in Russia. Annual inflation may be rising, but this is associated primarily with the effect of last year’s low base. We believe that annual inflation in numerical terms will be the highest at the beginning of 2021. Inflation dropped to its low in February 2020. Therefore, annual inflation may reach its peak next February due to the effect of this year’s base.

As regards proinflationary pressure (we are measuring it as a seasonally adjusted annualised indicator, so to say), this pressure has started to lower after its surge in March—April, having gone through the ceiling in April. Further on, we expect disinflationary factors to prevail.

As to the efficiency of our monetary policy, we agree and have always emphasised ourselves that monetary policy and its easing are most efficient at the stage when restrictions are cancelled. As long as restrictions remain in place, monetary policy easing may really not always achieve its objectives. In such periods, fiscal policy and fiscal incentives are more important. Therefore, our monetary easing measures are timely, in my opinion. Firstly, Russian regions have already started to lift their restrictions. Secondly, we should take into account that our decisions have a time-lag effect. It generally takes from three to six quarters for our decisions to influence the economy. This is why we expect that the effects of monetary policy easing will manifest themselves exactly during the period of economic recovery. In this respect, the decision we have made today will extend to the economy, but this will happen with a time lag. We have not tied our hands by this decision, and we believe that if the situation is unfolding according to our baseline scenario, we will probably even have an extra space for monetary policy easing. Anyway, when making our decision, we will be governed by our objective to ensure price stability and maintain inflation close to 4%.

QUESTION from Izvestia:

Does the Bank of Russia expect deflation in August and September?

ELVIRA NABIULLINA:

This is entirely possible. This is typical seasonal deflation largely resulting from the trends of fruit and vegetable prices. This is possible, but still does not happen every year. Moreover, our production of fruit and vegetables has become more uniform today. Owing to the development of the green-housing industry, seasonal differences in fruit and vegetable prices may decrease. However, this is still possible in summer and at the beginning of autumn.

QUESTION from Realnoe Vremya (Kazan):

When does the Bank of Russia expect the economic effect of the key rate reduction? What effect do you expect?

ELVIRA NABIULLINA:

I would like to repeat once again that we really expect to achieve the economic effect, but it will have time lags for both inflation and the economy. These lags could have changed since the current situation is altering households’ and businesses’ behaviour and preferences and increasing credit risk assessments, which might have caused certain modifications in the transmission mechanism. Nonetheless, we will see changes in three to six quarters. Furthermore, the effects of our earlier decisions will also be accumulating. I would like to remind you that we have started to ease our monetary policy last June. We really suspended the easing of our policy in spring 2020 because of the volatility in financial markets. Overall, we have been easing our monetary policy for a whole year already, with the effects of each decision accumulating and complementing one another, thus influencing the economic situation.

QUESTION from Kommersant:

Three years ago, you were extensively discussing food inflation and the issue of food inflation in terms of production. What is your opinion about how the recent months’ events may impact the agricultural industry and food inflation expectations for the next year?

ELVIRA NABIULLINA:

That is true, food prices and harvest prospects, so to say, have been influencing for a long time until now the pace and trends of inflation, especially in summer and winter. Additionally, the amount of product stocks created may also impact inflation in both autumn and winter. We have seen the estimate of the Ministry of Agriculture, and we have discussed this issue specifically on the eve of the Board of Directors’ meeting with our regional branches in order to be aware how regions themselves forecast their harvest. At the moment, the growth rate of agricultural output may be expected to be similar to previous years’ performance. We do not see any significant disinflationary or proinflationary effect in this regard. Prices are more likely to stay stable. However, a lot will certainly depend on how the situation will be unfolding in the next few months, which is why we will be monitoring it closely.

QUESTION from TASS Agency:

Does the Bank of Russia consider it necessary to continue its regular briefings on the economy and to further publish its Financial Pulse review?

ELVIRA NABIULLINA:

This is a very good question because I was actually going to inform you that our today’s Financial Pulse will probably be the last issue. In future, we will publish statistics on loan restructuring and provide information to you every two weeks. Overall, we will switch to a more standard mode of work and more standard approaches. Hence, our briefings will also become more standard. The next meeting of the Board of Directors will be a core one and will be followed by a press conference.

I would like to thank you all for your attention and questions. I wish you good health and best luck. Thank you.