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Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting 11 June 2021

11 июня 2021 года
Выступление

Today, we have decided to raise the key rate by 50 basis points to 5.50% per annum.

As inflationary pressure has notably strengthened, we need to ensure price stability consistently and actively. We see the necessity of further increases in the key rate at upcoming meetings.

Let me dwell on the factors behind the today’s decision.

First. The Russian economy will return to its pre-crisis level during this quarter. Its H1 growth exceeds the pace we factored in in the April forecast. Leaving out restrictions on oil production and international passenger travel, it is clear that the output in most key industries has not only bounced back to the end-2019 level but outstripped it. Russia is among the group of countries that will be the first to reach the pre-pandemic level of output.

It is typical of the current situation in many sectors of the economy that growth in demand is outpacing the potential to expand supply. Companies need time to roll out new capacities, and also hire and train staff.

Demand is growing both domestically and abroad. The activation of external demand is underpinned by a faster-than-previously-anticipated rebound in the global economy and trade. The main reasons are abating epidemic risks, given vaccination rates, and extremely loose monetary and fiscal policies in major economies.

The aggregate demand is also affected by the elevated growth rates of raw materials and component inventories. Firstly, companies make up for the drop in inventories incurred during the pandemic and as a result of disrupted logistical chains. Secondly, in light of the last year’s experience companies are seeking to accumulate more inventories to insure against possible disruptions in supplies, as well as further price increases. These processes concern a broad range of production chains rather than a narrow group of goods.

The structure of demand is also changing, as a result of changes in people’s way of life due to the pandemic. Neither the sustainability nor the duration of this process is clear so far. Yet, it evidently creates bottlenecks on the supply side. For instance, massive work and study from home spurred a sharp increase in the need for telecommunications followed by a considerable increase in the demand for microchips. Online orders require much more packaging materials. A pick up in demand for real estate is in part associated with the desire to reach comfortable conditions for working from home. Wishing to support their economies, many countries are expanding infrastructure projects; all this also influences the increase in demand for construction materials and metals.

It is still difficult for businesses to assess which part of the elevated demand is temporary and which — sustainable. They need time to make decisions about investing in new production facilities. Moreover, these decisions may be postponed given the large-scale changes concerning the regulation of greenhouse gas emissions and corporate taxation. These transformations can significantly change the economic situation in many industries and the return on investment in them. Such uncertainty is able of decelerating capacity expansion globally. In these conditions, the aggregate supply will be less elastic, responding less flexibly to the pick up in demand even over the mid-term horizon, compared to previous years.

Coupled with the accommodative monetary policy and fiscal policy of major economies, all these factors strengthen the risk that the acceleration of inflation both in this country and in the majority of other countries is of a more sustainable nature than perceived at first glance.

In the Russian economy, demand is growing energetically and sustainably. This is especially noticeable in the non-food segment. People continue to actively buy household appliances, construction materials, and furniture. The change in car sales is a clear manifestation of the pick up in domestic demand. In recent months, their sales have exceeded the 2018 level, which was a record high compared to 2014. The sales of apartments have increased considerably. To finance these large purchases, people use their savings, including money saved due to restrictions on foreign tourism, and take out more loans. In the services sector, the recovery has not yet completed mainly due to remaining anti-pandemic restrictions.

The demand for labour is bouncing back, with some industries noting a certain deficit of labour force. This is associated both with borders closed for labour migrants and with the expansion of several industries’ need to hire more staff than before the pandemic. The annual growth of nominal wages remains within the range of recent years.

Accommodative monetary policy was required to ensure a faster return of demand to its pre-pandemic level and to restore output. Once recovery is completed, supply cannot keep pace with further fast expansion in demand. Therefore, accommodative monetary policy would continue to step up inflation rather than expand output.

This brings us directly to the second factor underlying our today’s decision.  Inflation becomes a growing concern. In May, annual price growth rates reached 6%, considerably exceeding the target level. The current inflationary pressure has intensified. The average three-month (from March to May) seasonally adjusted price growth peaked up to a maximum since January 2016. Similar trends are observed for other indicators of price dynamics under our consideration.

It does not seem correct to attribute this elevated price growth exclusively to the impact of transitory supply-side factors, in particular, global price movements. Let me remind you that this explanation was the main one when prices picked up in Q4 last year. At that moment, doubts indeed persisted as to the sustainable nature of demand recovery given the ongoing pandemic. Nonetheless, even then we aired fears that the rise in inflation expectations driven by these external shocks might transform one-off proinflationary factors into sustainable ones. We may see now that in recent months the proinflationary impact of demand has become prevailing.

The fundamental difference of the so-called ‘cost inflation’ from ‘demand inflation’ is how it influences the physical volumes of consumption. In case of ‘cost inflation’, that is, supply shock, prices are growing, but consumers have to buy less in response. Businesses can only partially translate their costs into prices, as demand is limited. Whereas, if both prices and sales volumes grow, and this is exactly what we are seeing now across quite a few market segments, it means that the expansion in demand is by far exceeding the impact of supply-side factors. Therefore, it means that we are facing ‘demand inflation’.

Finally, elevated inflation expectations do make a considerable contribution to inflation. In anticipation of price increases, consumers are ready to start buying earlier than they previously planned. Thus, given the unanchored expectations even transitory price spikes may become more sustainable.

Why is the acceleration of inflation posing a threat? It is more difficult for companies to stick to their business plans, predict financial flows, and hedge against volatility. It is the most vulnerable citizens that are hardest hit by inflation. Low-income families spend increasingly more funds on essential goods. High inflation boosts inequality, lowers social security, and undermines the financial standing of most families. That is why our main task is to stabilise price growth as soon as possible by curbing inflation expectations and not allowing inflationary spiral to exacerbate.

According to our estimates, annual inflation is expected to be higher than we forecast in April but lower than its current level. Due to the high base effect in the first half of this year annual inflation will return to the target only in the second half next year.

Third. Monetary conditions remain accommodative. Interest rates on loans and deposits are low as compared to current and expected inflation. Our decisions to raise the key rate in March and April have not yet been fully reflected in banks’ interest rates.

Banks’ lending and deposit rates are closely connected with yields on government bonds, OFZs. OFZs are risk-free ruble assets for banks and the pricing of all other ruble products of banks is pegged to them. OFZ yields with various maturities change together with the key rate, though to a different extent.

The key rate impacts to the most extent the yields on short-term OFZs, with maturities of up to two-three years. These yields have increased significantly over the past two months. They will impact the cost of short-term loans and also deposit rates, which have already started rising.

Meanwhile, yields on long-term OFZs are largely determined by long-term inflation expectations, the assessment of the macroeconomic policy stability, and external environment. The cost of long-term financing of investment projects as well as mortgage loan rates depend precisely on the yields on long-term OFZs. Pursuing monetary policy to stabilise inflation and raising the key rate to achieve this, the Bank of Russia curbs growth in long-term interest rates in the economy. This quarter experience is a good illustration of the above. Despite the increase in the key rate on three occasions since last March for a total of 125 basis points, the yields of long-term OFZs are currently on the same level as in late March.

As far as the pace of lending growth is concerned, it remains high both in corporate and particularly retail segments. Thus, mortgages are rising by more than 25% year-on-year. In addition, retail loans are heating consumer demand. We are also concerned by the fact that lending is growing due to loans to borrowers with a high debt burden. Therefore, we resume pre-pandemic macroprudential add-ons on unsecured loans from 1 July and on mortgage loans with a low down payment and a high debt-to-income ratio of borrowers — from August. The Bank of Russia will stand ready to further increase macroprudential add-ons to prevent the accumulation of systemic risks and to ensure financial stability.

Since our meeting in April, the balance of risks has tilted even more towards proinflationary risks.

Elevated inflation expectations as a response to high inflation and low interest rates still pose a major risk. With fears of future price growth, people tend to spend more today and save less for tomorrow. This makes prices grow even more rapidly.

Disinflationary risks look weaker. They are connected with, firstly, a faster reopening of borders. In this case, domestic demand may partly shift to imports of tourism services, easing domestic demand-side pressure on prices. Secondly, if the pandemic deteriorates, depending on the pace of vaccination and the spread of new coronavirus strains, the global economy will grow much more slowly. Thirdly, a bumper harvest may cause inflation to slow down.

As far as monetary policy prospects are concerned, we are prepared to step up actions needed to bring inflation back to the target. As I have already mentioned, the Board of Directors sees the necessity of further increases in the key rate at upcoming meetings. We will determine the scope and pace of increasing the key rate based on our assessment of the level of sustained inflationary pressure, the timeframe for inflation expectations stabilisation, as well as the forecast of further movements of aggregate demand and supply. Our monetary policy will ensure annual inflation to return to the near 4% target in the second half of 2022.

Thank you for your attention!

Q&A for the Media

Question from Reuters:

What inflation rate the regulator expects by the end of 2021, given the actual figures for May? Have you changed your estimates of the average key rate for this year? Does the Central Bank assume that it might shift towards tight policy earlier?

ELVIRA NABIULLINA:

As I have already said, we expect that annual inflation will drop below its current level by the end of the year. However, it will likely exceed the range of the 2021 inflation forecast we presented in April. We will give an adjusted forecast in digital form in July after we hold our core meeting. Of course, we will revise all our forecasts.

As regards the estimate of the average key rate for this year, we will also adjust it in the forecast, but it will apparently be slightly higher than previously forecast.

Speaking of policy tightening, we do not rule out the possibility of shifting towards moderately tight policy. We have never said that this is impossible. However, this shift has become more likely now, although this is not inevitable. Everything will depend on economic and inflation trends and inflation expectations.

Question from TASS Agency:

Could you please comment on the announced changes in the subsidised mortgage lending programme? Do you support the new conditions? Could this extension cause the risk of a bubble in the mortgage market?

ELVIRA NABIULLINA:

Indeed, we had been discussing how the subsidised mortgage programme could be transformed. The decision that was proposed is very reasonable, in our opinion. What effect will it have? On the one hand, it will certainly decrease prices and the soaring demand for housing and the market will cool down to a certain extent.

In other words, the programme that was implemented as an anti-crisis one will be phased out. However, I would like to reiterate that we consider that subsidised mortgage lending was really very efficient as an anti-crisis programme. Nonetheless, it should be ended gradually and in due time. Of course, it may not be terminated at once, as this could drastically alter conditions and demand trends, especially when the market is somewhat overheated.

Nonetheless, we believe that the reduction in the credit limit to three million rubles, for instance, would decrease lending amounts and the soaring demand for housing in largest cities. As you remember, initially we proposed a region-based principle — selection of regions. However, we are very well aware that the situation in regions varies greatly: prices might surge in large centres, in regional centres, while this might not be observed in small cities where demand might be insufficient. This market is very region-specific. This is exactly why we believe that regulation through setting a limit for a subsidised loan is very reasonable.

That said, the increase in the subsidised interest rate to 7% will bring it closer to the market level, which is also very important. It is also essential that this decision will expand targeted aid provided to young families. This will also help support the mortgage market.

In our turn, we will monitor the quality of mortgage loans and lending standards very closely, and implement macroprudential regulation measures, where necessary, in order to ensure the appropriate quality of loans and prevent an uncontrollable rise in households’ debt burden.

Question from RIA Novosti:

Today, the Bank of Russia toughened its signal regarding the key rate. Now, it believes it necessary to raise it at the upcoming meetings. What is the potential for an increase, according to the regulator? What level of inflation expectations could prevent you from raising the key rate?

ELVIRA NABIULLINA:

We will present our revised forecast of the average key rate in July. Nonetheless, I would like to reiterate that we are ready to make such decisions on monetary policy and the key rate that will be needed to bring inflation back to the target. A possible increase will depend on actual data and developments.

What should be the level of inflation expectations? First of all, it should start to go down steadily. Currently, inflation expectations are slightly fluctuating month-on-month, e.g., they were a little lower in May than in April. However, we still do not observe a stable downward trend in inflation expectations.

Of course, we are very concerned about the fact that inflation expectations have been elevated for several months already — at least for more than six months. This certainly augments the probability of secondary effects.

Question from Bloomberg:

I have one question and one clarifying question. Could you please comment on shifting to moderately tight monetary policy? You have said that the probability of this shift has increased. Have I got it right that this is possible already this year? Is there a higher probability now that moderately tight monetary policy will be continued for a longer period, given that now you expect inflation to return to the target already in the second half of 2022?

My second question is about the National Wealth Fund (NWF). The Ministry of Finance announced its plans to remove the US dollar from the NWF’s liquid assets. Am I to understand that from now on the Central Bank will avoid dollars and purchase only euros, yen, and yuans in the foreign exchange market for the operations of the Ministry of Finance? What about gold? Will the Bank of Russia buy gold for the Ministry of Finance or will it make transfers somehow from the reserves into the NWF’s accounts?

ELVIRA NABIULLINA:

As regards moderately tight monetary policy, the probability has indeed increased. However, it would be too early now to say when this might happen and whether this is inevitable. This probability is really higher now, but, as I have already said, this is not certain. We will decide when, how much and how fast the key rate should be raised depending on the actual situation, including movements of inflation expectations.

Speaking of changes in the currency composition of the NWF, I would like to note that we make fiscal rule-based purchases of foreign currency, including euros and dollars, in the domestic market for the operations of the Ministry of Finance. As to the operations needed to bring the currency composition in Russia’s gold and foreign currency reserves into compliance with the required composition (which is determined by the Bank of Russia for the country’s gold and foreign currency reserves in general), we conduct these operations in the external market.

Managing foreign currency reserves, we take into account the NWF’s currency composition, as this is our obligation to the Ministry of Finance. However, this is not the only factor. I would like to remind you that the NWF accounts for approximately a fifth of the country’s gold and foreign currency reserves, and we will take this into account. 

We do not plan to buy gold in the domestic market in connection with the changes in the NWF’s currency composition. There is no need to do this.

Question from Interfax:

Are we to understand that an increase in the key rate in July currently appears to be inevitable and the only question is about the size of this increase? Is there still any possibility that you might decide to pause this process at the July meeting due to the worsening of the epidemic situation in Russia? How do you assess the neutral range at the moment, given the current inflation rate?

My second question is as follows. What is the peak of inflation you expect and, accordingly, when will it reach this peak? Do you still expect that inflation will start to subside in autumn?

ELVIRA NABIULLINA:

Speaking of the key rate, it is highly probable that we will raise it in July. However, we should not rule out a pause either since our life, which is much more diverse than any forecasts, might create various unforeseen circumstances, including those that might require a pause. We should not say that this is totally impossible. Nonetheless, it is highly likely that we will raise the key rate.

As regards the neutral range, this is a good question. As you probably remember, we determined the neutral range as 5–6% in nominal terms in a situation where inflation is close to our target of 4% and, accordingly, output is at the level of its potential. This means 1–2% in real terms. However, when inflation is elevated, the shorter-run neutral rate might certainly be higher.

Nonetheless, we have not changed our view of the longer-run neutral rate. At the moment, it would be rather difficult to say whether it is necessary to change it.

Speaking of the time when inflation might peak, this is hard to predict now. We will monitor its pace, and this will be clear from inflation movements. Nonetheless, the peak of inflation will be approximately at the current level or, possibly, a little higher.

We believe that inflation will start to slow down in autumn, and this will be driven by two main factors. First of all, this is the base effect. Secondly, this is the impact of our monetary policy as the current inflation rate — annual inflation — was formed under the influence of the monetary conditions in the economy that were created when the key rate was 4.25%. As you remember, our decisions have a time lag effect. The decisions on the key rate increase we made beginning from March have not yet fully transmitted to bank rates and, accordingly, inflation. This impact will manifest itself over time. Therefore, the effects are already emerging, and we can observe them in deposit rates that are slightly changing.

Nonetheless, these effects, even taking into account the earlier decision, will manifest themselves progressively. We believe that, as a result of this influence, inflation will start to subside beginning from autumn. However, annual inflation might still edge up slightly due to a number of effects, including statistical ones, and very accommodative monetary conditions we had for a long time over the year.

Question from Kommersant:

Why do you think prices for services are growing relatively slowly? Are there any factors behind demand trends in services, other than purely epidemic-related factors?

ELVIRA NABIULLINA:

First of all, price growth in services, especially in some areas, is already significant now. Speaking of the hotel business, for instance, the monthly inflation rate for May differs from the weekly figures on inflation, which is associated, among other things, with a surge in prices for hotel services that are taken into account in monthly inflation to a greater extent.

Overall, the statistics on price movements in services are rather distorted. This is because prices remained at a fixed level over the period when service companies were closed. This is the problem.

Furthermore, a number of regions still have a range of restrictions in place. This is what you called an epidemic-related factor.

Nonetheless, we can see that price growth already exceeds 4% in everyday services, hotel services, medical services, and so on.

Question from Forbes:

I have another question regarding the NWF. Will the Bank of Russia change the structure of the gold and foreign currency reserves after the decision of the Ministry of Finance and in what way?

You have said earlier that you do not comment on the gold and foreign currency reserves. However, may be there is some decision already that you might talk of.

ELVIRA NABIULLINA:

Firstly, we never announce our plans regarding how we will change the structure of the gold and foreign currency reserves. We only disclose the structure of the gold and foreign currency reserves with a time lag of six months. I would like to remind you that this is because Russia is a major player in the world market of reserve assets.

Nonetheless, when making our decision, we take into account the currency composition of the NWF and changes in the NWF’s currency composition. However, as I have already said, this is only one of the factors as the NWF accounts for about a fifth of the country’s gold and foreign currency reserves.

Furthermore, we made the main changes in the structure of our gold and foreign currency reserves back in 2018.

Question from Rossiyskaya Gazeta:

Does the Bank of Russia support the extensive plans for the de-dollarisation of the Russian economy and financial system? Will the Central Bank propose any new initiatives to achieve this objective? Is it possible that Russia will completely substitute dollars in its international reserves? Will the portion of other assets increase significantly in the international reserves? In this case, what might be chosen — euros, yuans, or gold?

ELVIRA NABIULLINA:

As regards de-dollarisation, we have been implementing the policy of de-dollarisation for many years already, and not only in the financial system, but in the Russian economy in general. Moreover, our monetary policy aimed at maintaining a steadily low inflation rate supports the de-dollarisation of the Russian economy as previously people often opted for foreign currency fearing that their savings and incomes denominated in Russian rubles might depreciate. Therefore, the inflation targeting regime in itself and low inflation should and will make the Russian currency more attractive.

Second, we have been pursuing a committed policy for the de-dollarisation of banks’ balance sheets through the differentiated regulation of the reserve requirements. We have been observing such changes. If we analyse the information beginning from early 2016, we will see, for instance, that the portion of foreign currency liabilities to corporate clients, or simply said, corporates’ foreign currency deposits has decreased considerably. It was about 49%, whereas now it is a little more than 35%. Households’ foreign currency deposits have changed in the same way. They have decreased even more significantly, specifically by nearly nine percentage points since early 2016.

Furthermore, the portion of foreign currency loans to corporates has also contracted. The amount of retail loans in foreign currency is very small, and corporate loans in foreign currency have also decreased by about 14%. Of course, foreign currency lending does exist still. Many enterprises need foreign currency loans, but there is an evident trend for de-dollarisation.

As regards our reserves, I have already said that we made the main changes back in 2018. We made these changes taking into account returns on and liquidity of various types of reserve assets, as well as their reliability. We considered not only financial and economic risks, but also non-economic risks.

We are not aiming to achieve complete de-dollarisation. However, I would like to emphasise once again that the currency composition of the reserves certainly takes into account various sorts of risks, including non-economic ones.

Question from The Bell:

I have the following practical question. You often say that there is currently a large number of retail investors in the securities market. Many of them are newcomers. What conclusions do you think they should make from today’s key rate increase? Overall, what would this general trend to raise the key rate and still growing inflation mean for private, or, so to say, small investors?

ELVIRA NABIULLINA:

On the one hand, the inflow of retail investors to the securities market is a very positive trend. This expands people’s opportunities to invest funds in a variety of institutes — not only bank deposits, but also various financial institutes. In this regard, it is essential to protect retail investors who should be aware of the type of securities they invest their money in, their expected performance and inherent risks.

We comprehend that such a significant inflow to the securities market has happened not only because people want to expand their investment opportunities, but also due to a decrease in deposit rates. Bank deposits are also a financial instrument, but it is probably the least risky and most protected one, since deposits are insured. Of course, the increase in the key rate and lower inflation will make bank deposits more attractive for people.   

Question from RBC:

The Central Bank is regularly revising its forecast of when inflation will return to 4%. What actions will you take if it becomes clear that inflation will not go back to 4% in 2022? Might the key rate go beyond the neutral range and in what circumstances? Is it possible that the Bank of Russia will revise the neutral range?

ELVIRA NABIULLINA:

Indeed, we adjust our inflation forecasts. We can say that forecast revision is a routine procedure within monetary policy. We revise our forecast four times a year as the situation is changing. This is because we have a market economy, and not a centrally planned one. Market factors generate various trends in the economy, inflation, and inflation expectations. This is totally normal to adjust forecasts considering new data obtained.

As regards our actions if it becomes clear that inflation will not go back to 4% in 2022, we will revise our monetary policy. We might increase the key rate even more if we understand that there are risks of elevated inflationary pressure and that it might persist longer.

Might the key rate go beyond the neutral range and in what circumstances? This is the question about the possibility of shifting towards moderately tight monetary policy. Indeed, we do not rule out this possibility if this is needed to bring inflation back to 4%, if inflationary pressure intensifies, and inflation expectations do not start to go down.

Speaking of the neutral range, at the moment we do not revise our long-term estimate of the neutral range, but, as always, we will provide more details on our approaches in the Monetary Policy Guidelines we currently start to draft and will present in autumn.

Question from Premier (Vologda):

Prices are persistently growing, as you have already said, and it is increasingly harder for high value-added companies to survive. What measures, in your opinion, would be most efficient to aid the real sector and does the Bank of Russia plan to change its monetary policy to support the real sector?

ELVIRA NABIULLINA:

We firmly believe that our policy for maintaining steadily low inflation contributes to the development of the real sector of the economy. One of the achievements of the policy for keeping inflation at low levels should be and is the stability of long-term interest rates, which I mentioned in my statement, and the affordability of long-term financing.

Specifically, we can observe this in the active development of mortgage lending, which has become possible not only owing to the subsidised programmes. It was actively expanding even before the launch of the subsidised programmes — during the pre-pandemic period, because long-term interest rates became more stable and the affordability of long-term financial resources increased.

Speaking of possible changes in monetary policy, it is often suggested to reduce the key rate, regardless of growing inflation. If we disregard inflation and cut the key rate anyway, we believe that inflation would continue to rise in this case, and people would again lose confidence in the ruble. The share of foreign currency in the economy would increase, and there would simply be no long-term loans which are so necessary for the real sector.

This is low inflation that is the main factor of the affordability of credit. If inflation rises, no reduction in the key rate would help improve the affordability of loans the real sector needs to increase labour productivity and introduce innovations.

Therefore, we hold that by pursuing our monetary policy and decreasing the inflation premium included by banks in their interest rates we are making credit more affordable.

Question from Izvestia:

Do you have any estimates of how a possible reopening of multiple tourist destinations this summer might impact inflation?

ELVIRA NABIULLINA:

You probably mean foreign destinations because people may travel anywhere inside the country. At the moment, we do not observe such influence. Of course, we take it into account as a possible risk to the baseline scenario. If foreign destinations are reopened, this will have a disinflationary effect. Today, it is difficult to estimate it, but we do consider this potential disinflationary factor.  

QUESTION from Russia 24 TV channel:

You have commented several times on the regulation of prices for goods in Russia. This week, China started to regulate prices for industrial goods.

Is it possible that increasingly more countries will be introducing such measures? Does this mean that they might become long-lasting, including in our country? How will the Central Bank respond to such developments?

ELVIRA NABIULLINA:

Indeed, we see that a number of countries (although I should note that this is not a widely spread practice) are introducing administrative regulation seeking to stop price growth. This is their response to increased global prices for several types of goods, primarily commodities, etc.

In our opinion, these measures are possible as temporary regulation. However, administrative regulation just spreads the effects on prices over time. Therefore, supply should nonetheless adjust to demand. If the areas of administrative regulation expand, this might cause very negative consequences associated, among other things, with potential shortages and so on.

Question from Komsomolskaya Pravda:

Average inflation is 6%, but prices for some products surged by dozens of per cent or even several-fold, e.g., prices for construction materials. Will prices for these goods go down in the future? Does the Bank of Russia have any forecasts regarding this?

ELVIRA NABIULLINA:

Headline inflation is indeed above our target equalling 6%, but even this inflation rate comprises product groups where prices are growing very fast. We do not give forecasts for individual categories, but I can say that when headline inflation is lower, there will certainly be fewer opportunities in individual categories to pass through higher costs to price growth.

We believe that such a nearly several-fold increase in prices for a range of products is still a temporary phenomenon, including for construction materials you have mentioned. We could see it in the monthly inflation rate for May that the figures are very high. Among other things, this is associated with the surge in housing sales we observed. We have already expressed our concerns about the soaring demand for mortgage loans, which is not only pushing up prices, but is simultaneously affecting related industries, including furniture, construction materials, and others. When supply does not adjust promptly, all these factors spur prices, and we can see that supply fails to keep pace with demand. This is why we are saying that inflation is largely fuelled by increased demand.

Question from Stolica-S (Republic of Mordovia):

Do you believe it necessary to introduce state regulation of food prices? Will this slow down inflation?

ELVIRA NABIULLINA:

This extends the question about the role of regulated prices. My short answer is no. I would like to repeat that such temporary administration of prices could only prolong the period over which prices for certain products will be adjusting to changes in demand and supply.

If prices remain fixed for a long time below the level needed to balance demand and supply, this might create shortages and even black markets. This is exactly the situation occurring in a centrally planned economy with prices regulated at the government level.

Probably not everyone remembers, but most of us still perfectly remember the experience of the last years of the USSR when official prices were fixed and there was allegedly no inflation.

However, with these official prices, it was impossible to satisfy demand during that period, whereas prices in the black market were growing very fast — although there were no statistics on them, people could clearly observe that rise. This manifested itself later on: when the authorities stopped to control prices, it became evident how high accumulated hidden inflation was.

Nonetheless, we believe that shortages are more dangerous than inflation. When inflation rises, we can bring it back to the target by pursuing a consistent monetary policy, an inflation targeting policy, which we have been doing over the last five years.

If there is a deficit of some products with administered prices, inflation will not decelerate because an artificially reduced level of prices with administrative regulation in place cannot create sufficient incentives for producers to expand output. Of course, any overuse of price administration might entail extremely adverse consequences.

Question from Reuters:

Does the Bank of Russia forecast an inflow of investment into ruble assets following the key rate increase which makes carry trade more attractive? How long might this last?

ELVIRA NABIULLINA:

Speaking of today’s reaction of the foreign exchange market, it is not strong, as our decision was largely in line with market expectations. Nonetheless, the increase in the key rate generally makes ruble assets more attractive.

We do not expect any significant rise in carry trade and related risks.

Question from Interfax:

The recent Saint Petersburg forum demonstrated that interest in green financing is growing fast. Nearly every second session was dedicated to this topic. Everyone has become ‘green’. Actually, everyone requires the Central Bank to grant some regulatory easing — otherwise, it turns out that investment in green social loans is a sort of charity on the part of banks as they actually gain no benefits, other than reputation.

What regulatory relaxations might the Bank of Russia technically grant to banks as regards lower reserve rates or risk ratios?    

My second question is as follows. The Central Bank recently raised the issue of the regulation of financial holding companies and prepared a relevant draft law. This topic had been previously discussed in connection with the situation in Bank Otkritie and its controlling holding company. Since then, several years have passed already, and it seems that there have been no major cases any more.

What are the reasons behind this initiative of the Central Bank? Are there any risks that some unofficial holding companies are buying up non-governmental pension funds or any other companies in the financial market and, consequently, are exposed to some high risks?

ELVIRA NABIULLINA:

Speaking of the ESG agenda, the ‘green’ agenda, the world actually started to discuss this topic by analysing risks caused by climate changes and policies to be pursued in order to consider and mitigate such risks generally for economies and the society. Of course, the financial sector providing funds for economic development plays a vital role. 

Hence, we believe it totally erroneous to say that we start to grant regulatory easing only for green projects. The question is about a proper assessment of risks associated with climate changes. These are systemic risks. Climate risks of the so-called brown projects and brown companies are underestimated. It is necessary to assess them correctly, or even tighten such assessments. The question is about the appropriate assessment of such risks.

It is hard to develop regulation in this area as we lack statistics series demonstrating how these risks might materialise and, among other things, might affect default rates. Nonetheless, we carry out stress tests and build various scenarios for such a situation in order to assess these risks, as well as the quality of green products, by the way.

We will discuss this issue with financial institutions. However, this is not about granting any regulatory relaxations based on the ‘green’ label. The question is about an appropriate risk assessment that should be taken into account by the financial market.

Furthermore, I would like to emphasise that this is not only the financing of green projects that matters, but also the financing of transition projects, transition bonds, when less-than-green firms have opportunities to finance their transition to green projects. This task is no less important than the financing of, so to say, totally green projects.

As to the regulation of financial holding companies, this topic is indeed quite challenging. There are many questions in this regard and great resistance. Nonetheless, this topic is on the agenda. We do not see any risks today or in the near future.

There is no urgent need in this regulation. Rather, regulation is needed in the area of ecosystems. These are some new forms of interpenetration of financial and non-financial businesses and they should be transparent. Furthermore, we need to understand all risks and, accordingly, consider them in regulation.

I would rather focus on the fact that we should develop approaches to the correct regulation of ecosystems. On the one hand, this regulation should promote their development making them convenient for people and businesses. On the other hand, we need to understand all risks and take them into account in the relevant regulation.

Question from TV channel Saint Petersburg:

Will the changes in the subsidised mortgage programme reduce the gap between housing price growth and inflation, in your opinion? If so, to what extent? 

ELVIRA NABIULLINA:

Such a gradual phasing-out of the anti-crisis subsidised mortgage programmes and shifting towards targeted subsidised mortgage programmes is certainly aimed at decreasing the soaring demand for housing, which will help slow down the growth of housing prices.

Currently, the gap between inflation and housing price growth is rather large, and we believe that such measures should help achieve a better balance between demand and supply. This will reduce pressure on housing prices.

Question from Interfax:

My question is as follows. Did not the Bank of Russia Board of Directors consider a possible increase in the key rate by 75 or even 100 basis points at its meeting today? Do you share the opinion of the Minister of Finance that high annual inflation is a sign of overheating?

Does the Central Bank have sufficient resources to address the situation with inflation, or will it need support from the fiscal system? Could you please clarify for everyone where you are going to buy gold and how you will coordinate your operations related to the reserves in connection with the changes in the NWF’s currency composition?

ELVIRA NABIULLINA:

As to the options we discussed today at the Board of Directors’ meeting, there were suggestions to increase the key rate by 0.25 and 0.75 percentage points as well. However, today we discussed in detail only the possibility to raise the key rate by 0.5 and one percentage point. There were arguments both in favour of and against this increase.

Although we really discussed in detail a larger increase, there are two main reasons why we limited it to 50 basis points. First of all, the economy and the financial system need time to adjust to the changed key rate and, accordingly, monetary conditions should change.

Secondly, we still need more time to assess the effect achieved through the earlier increase in the key rate and the impact its increase today will have. We should receive more statistical data. In July, we will have statistics on inflation and inflation expectations for June and July, and the breakdown of GDP by expenditure for the first quarter.

We should also take into account that May is a special month. Although we consider only seasonally adjusted indicators, it is nonetheless a month of holidays. We certainly need to analyse indicators for June and July.

As regards the Ministry of Finance, the risk of overheating and so on, expansionary fiscal policy basically involves proinflationary effects. All else being equal, rising budget expenditures might result in a key rate increase and monetary policy tightening.

Of course, we make our monetary policy decisions taking into account the budget, budget expenditures, and moreover — not only budget expenditures, but also the budget deficit and the fiscal policy stance. This is a major factor in decision-making.

However, by implementing monetary policy measures and inflation targeting, we are able to bring inflation back to the target. Nonetheless, I would like to stress once again that expansionary fiscal policy certainly involves proinflationary effects, which is why we support the Government’s policy for returning to the fiscal rule parameters completely as early as by 2022.

Speaking of gold, the NWF already has a substantial amount of gold. Hence, as regards increasing the amount of gold in the NWF’s structure, we take this into account, yet there is no need now to start gold purchases in the domestic market. Furthermore, the gold held by the Bank of Russia considerably exceeds the amount bought for the NWF.

Question from RIA Novosti:

The Bank of Russia repeatedly said that the economy was bouncing back faster than expected. Might economic growth exceed the Central Bank’s forecast of 3–4%? How do you estimate the contribution of vaccination to economic growth?

ELVIRA NABIULLINA:

We expect the economy to recover already this quarter. In April, we forecast that GDP growth for this year would be about 3–4%. We will revise our forecast in July and apparently raise our estimate of GDP growth for this year.

However, the question is not about how quickly the economy will rebound, but rather how fast it will expand after the recovery. To this end, it is essential to ensure that this is not a rise in inflation, by an increase in economic potential.

This is probably not very correct and even might be dangerous to believe that a 3–4% GDP growth in the medium term could be achieved through faster inflation. We need to improve labour productivity and economic potential in order to achieve sustained economic growth.

As regards the contribution of vaccination to GDP growth, vaccines create herd immunity and, accordingly, will positively influence GDP. In the first place, vaccination might help lift the remaining restrictions that are still in place in some sectors, including in services.

Secondly, vaccination might reduce the scale of a possible resurgence that might entail restrictions for the economy. As you know, some people fear that there might be new mutations, strains, and some new epidemic waves. Of course, vaccination is crucial to create this herd immunity.

Moreover, both Russian and foreign investors would have greater confidence in Russia’s economy if we have this herd immunity. Generally, this improves investment prospects.

Thank you very much for your attention.