Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 7 June 2024
Good evening,
Today, we have made the decision to keep the key rate at 16% per annum.
In recent months, we have been observing a pause in the deceleration of current inflation and steadily high economic growth rates. Nevertheless, the data available do not allow us to make any unambiguous conclusion about further development of the Russian economy. Our baseline scenario, which is the most probable one, still assumes that overheating of the economy will start decreasing in 2024 Q2. However, the scenario that would require an additional key rate increase for disinflation to gain new momentum has become more likely. The choice between these two scenarios will be the key point of our core meeting in July.
I would now dwell on the reasons behind our today’s decision.
Firstly, as regards inflation.
The key rate increase in 2023 H2 helped notably slow down price growth. However, in April—May, we received data signalling that disinflation might have paused. Current price growth rates returned to 6% in annualised terms in April and remained elevated in May, high-frequency data show. One of the factors impacting the price dynamics during these two months was a one-off indexation of prices for domestic cars and communications services. Nevertheless, the measures of underlying inflation were growing in April as well. Moreover, after the four months of a decline, households’ inflation expectations rose again in May. Analysts and financial market participants also raised their forecasts.
All these factors are intensifying the risks that the measures of underlying inflation might be declining not as quickly as assumed in the baseline scenario and might get entrenched at the current level or even accelerate. In this case, we would need to additionally raise the key rate. This alternative scenario will remain a subject for discussion in the course of our July meeting when we obtain comprehensive data on price dynamics in May and June and more information about economic and lending activity.
Secondly, the economy.
We have received very strong data on economic activity and the labour market. Over 2024 Q1, GDP was up by 5.4% year-on-year, and the annual growth of nominal wages exceeded 20% in March. These figures might be evidence of a faster rise in demand. However, we should remember that GDP growth might be slightly overestimated because of the leap-year effect. As to wages, the surge might be associated with the payment of large annual bonuses for the financial year that was very successful for many sectors. In other words, although economic activity remains high, it might actually be somewhat lower than these figures.
As before, we consider that the output gap remains significantly positive. Overheating in the economy in 2024 Q1 has not decreased at the very least. In the first place, this is evident from elevated price growth rates, especially in unregulated sectors. One of them is tourism, which was the subject of a separate box in the May issue of our Regional Economy report. Over the last year, the tourist traffic increased by a record 17%. During the May holidays this year, the southern regions, Saint Petersburg and Kaliningrad welcomed considerably more tourists compared to last year. High demand is promoting the development of the regional economy. However, its increase should be balanced throughout the country, and supply should adjust accordingly — this is an essential factor. Otherwise, high demand would translate into price growth. Russian regions need time to expand tourism clusters, specifically to commission new hotel buildings, find suppliers and especially labour resources. Growing tightness in the labour market, in particular historically low unemployment, is yet another strong evidence of substantial overheating in the economy.
As the official economic statistics are released with a time lag, we pay special attention to high-frequency data that our regional branches obtain directly from businesses. Some of them note signs of slower growth in demand and economic activity, in particular, lower producer prices and a reduction in output in mining and quarrying, metallurgy, and construction. In a number of regions, companies expect demand to be more moderate in the next three months. This is in line with our baseline scenario where the economy starts to grow at a more balanced pace already this quarter.
Thirdly, monetary conditions have somewhat tightened.
The market of federal government bonds has recorded a rather significant rise in yields for all maturities. Growth in interest rates in the money market and yields on federal government bonds for maturities of up to one year has been associated with expectations that monetary conditions would remain tight for longer. Increasingly fewer market participants expect the key rate to be cut soon. Another evidence of the tightening of monetary conditions has been soaring real yields in the segment of inflation-linked bonds amid a moderate increase in breakeven inflation. This tightening will be translated into other market rates.
Despite this, lending to both businesses and households has continued to surge. More moderate dynamics are only observed in unsubsidised mortgage lending so far. This trend in mortgage lending will be solidifying after the non-targeted subsidised programme is terminated in July. In the baseline scenario, we expect that our earlier monetary policy decisions and a long period of tight monetary conditions will help ensure more balanced growth rates in all lending segments.
Households’ saving activity remained high. In 2024 Q1, the saving ratio hit a ten-year maximum of this period. As before, high deposit rates have encouraged households to deposit funds with banks. Furthermore, competition between banks for depositors has increased after the limit for fee-free money transfers between an individual’s accounts was raised to ₽30 million. This encouraged banks to raise deposit rates to retain their clients. For the disinflation trend to solidify in the coming months, households should save a significant share of rising wages and the expansion of lending should decelerate. This assumes that the saving ratio should remain high or even rise somewhat further.
Now, I would like to speak of external conditions.
Overall, our view of global economic prospects has remained largely unchanged and is consistent with the baseline forecast. As global growth rates stay high, the demand for Russian exports will remain stable.
The situation with exports and the inflow of foreign currency earnings into the domestic market has been steady in recent months. The OPEC+ decision to extend the oil production quotas is paving the way for oil price stabilisation over a one-year horizon. The monetary policy pursued makes ruble assets more attractive and ensures more balanced growth rates in imports. However, the import dynamics in recent months might have been affected by payment problems caused by the sanctions. If the difficulties persist for a long time, limited import quantities might have a proinflationary effect in the medium term.
I would now dwell on the risks to the forecast.
Our baseline scenario assumes that, in 2024 Q2, growth rates will be more balanced and disinflation will accelerate. However, risks to this scenario have risen.
The first risk is that economic growth rates might continue to notably deviate from a balanced growth path. The second risk is that labour shortages will not be easing. So far, there are no signals that the labour market tightness is weakening. The third risk is rising inflation expectations. Finally, geopolitical risks remain quite strong.
In such situation, the alternative scenario is becoming more likely. It assumes that the supply of goods and services steadily lags behind demand and inflation begins to speed up again or gets entrenched at the current level for a long time. To be able to give a substantive assessment of the probability of this scenario, we need additional data on lending, economic activity, the labour market and inflation that we are to receive by July. Today, we do not have decisive arguments to reject the baseline scenario in favour of the alternative one. Nonetheless, I would like to reiterate that the likelihood of the latter has risen.
I would briefly talk of the budget. In May, the Government announced the parameters of the tax reform. They provide for an increase in profit tax, the introduction of more progressive scale of personal income tax and a number of other novelties. To make monetary policy decisions, we need to have a comprehensive insight into the situation, including budget expenditures. As the increase in expenditures will be fully funded from rising revenues, the overall influence on inflation will be neutral. However, there might be secondary effects related to the structure of these expenditures and revenues, and these effects might be both proinflationary and disinflationary.
Furthermore, with regard to fiscal policy, we will take into account the volume and duration of subsidised lending programmes. The larger is the volume of subsidised loans, the higher are interest rates needed for all borrowers to prevent high price growth. This applies not only to mortgages, but to the volume of subsidized loans in general, which are not really sensitive to the key rate changes. The larger is the volume of subsidized lending programmes, the higher will be the key rate.
Winding up, I would like to comment on monetary policy prospects.
The Bank of Russia remains determined to return inflation to the target of 4%. If persistent inflationary pressures do not ease and proinflationary risks materialise, we hold open the prospect of considerably increasing the key rate in July. Monetary conditions will remain tight for as long as needed to bring inflation back to the target.
Thank you for your attention.
Q&A for the Media
QUESTION from Bitkogan Project:
As it stands, is a rising key rate having less impact on inflation?
ELVIRA NABIULLINA:
Not really, we do not think that is the case. The key rate is an effective tool to influence inflation. However, we should be mindful of the developments surrounding our decisions. One of such developments I have mentioned is massive subsidised lending. That is, we realise that with some part of lending being insensitive to key rate movements, it takes a more drastic change in the rate to influence overall lending. That means the need to take such factors into account. While overall efficiency is in evidence, we should understand all the circumstances surrounding our decisions.
QUESTION from Interfax:
Is there still room to cut the key rate in 2024? What are the odds for a monetary policy easing in 2025?
While on the 2024 forecast for inflation you have removed, does this come as a result of the current misalignment with this forecast? Which range of inflation do you expect for this year?
Now, my final question: is annual inflation currently close to its peak or is it still on course to peak? Has the Bank of Russia changed its expectations for when a slowdown in annual inflation begins? Earlier estimates put it for the third quarter.
ELVIRA NABIULLINA:
As for the room to reduce rate, we rather face the alternative option of having the room to raise it. We could revisit the prospect of rate-cutting and discuss the room for it once the rate rise has lost its relevance. Further, we mention that the period of high rates is likely to be more extended than expected in April.
Speaking of inflation in 2024, indeed the odds are that annual inflation might climb above the range of our April forecast. The forecast is to be updated in July.
We expect annual inflation to peak in the third quarter, probably in July, which is driven by the indexation of utility rates, among other things. We have taken this into account. Yes, the expectation is for annual inflation to go down in the third quarter.
ALEXEY ZABOTKIN:
What we expect is that annual inflation decelerates in the third quarter as the high monthly price gains seen between late last summer and last autumn exit the calculations and as this year’s prices increasingly show a slowdown. Now again, monetary policy aims to deliver a sustainable reduction in current price growth rates from the levels they have held over the past two quarters.
QUESTION from Komiinform (Syktyvkar):
Today, interest rates are quite high. How can we explain that current rates are too costly for businesses to take out loans to fund development, on the one hand, but, on the other hand, corporate lending is continuing to expand at a fairly solid pace?
ELVIRA NABIULLINA:
As long as businesses are taking out loans, they are not seen as cost-prohibitive. This is also explained by high price expectations, which make real interest rates more acceptable to businesses. I think companies look to continued high profits. Their last year’s and current financial result is good. Specifically, their balanced financial result for the last 12 months totalled nearly 34 trillion (33.9 trillion) rubles. In other words, this financial result enables them to service high-interest loans.
Another factor spurring rates is, yet again, the overly large share of subsidised programmes. These are either insensitive or little sensitive to key rate movements. The share of such programmes (in mortgages, for example) is very large. They are far less common in corporate lending, but there are some there, too. The greater their share is, the higher we will have to raise the key rate or the longer keep it high.
QUESTION from TASS:
Has the Central Bank already made calculations as to how much the increased corporate profit tax will affect banks’ performance?
Another second question, please. Do you assume that subsidised mortgages for new housing may be extended this summer, but with different criteria?
ELVIRA NABIULLINA:
Yes, we have made calculations as to how the tax increase may affect banks. We estimate this tax at about 200 billion rubles. What does this mean? Doubtless, this will leave the financial stability of banks unaffected thanks to the capital cushions they have. Still, this is poised to lower their lending capacity. The reason for this is that banks rely on their profits to raise capitalisation. It is essentially equal to investment in the real sector, to capital investment, and the size of capital is the key driver for growth in lending. Banks, as I have said, have fairly solid capital cushions, but these are unevenly distributed. That is to say, some banks may shrug this tax off, but others may have to scale down potential expansion in lending.
As for mortgage loans for new homes, I do not assume that the non-targeted programme will be extended in any form — this extension is not under discussion. Discussions are now centred on Family Mortgage criteria. Today, the President has unveiled the additional initiatives, with details to be probably worked out, but these are limited to targeted programmes.
Clearly, targeted programmes are the better option, but what matters is their volume. If the volumes of non-targeted programmes are just replaced by the same volumes of targeted programmes, they will have the same impact on our decision. Therefore, the scope of these programmes is very important to us, and we will watch the Government’s decisions to measure their impact.
ALEXEY ZABOTKIN:
In response to the first question, let me make it more accurate to avoid any misunderstanding. We do not aim to lower lending capacity — we aim to make sure lending grows at a more muted pace given a higher profit tax.
QUESTION from Argumenty i Fakty:
How will the pension indexation for those working beyond retirement age affect the dynamics of the key rate?
On the new limit of 30 million rubles in the Faster Payments System you have mentioned, major banks still do not let their customers transfer more than one million rubles a day to another bank. Are you comfortable with this situation?
ELVIRA NABIULLINA:
As regards the indexation of pensions for employees past retirement age, no major effect on inflation is expected from it.
ALEXEY ZABOTKIN:
As it stands, we know that inflows of funds into the budget system at all levels are set to exceed the past October’s estimates for a three-year budget. This is attributed to a faster growing economy. Accordingly, the Pension Fund apparently has additional resources to index pensions paid to employees past retirement age. To the extent that any additional expenditure is covered by additional income, this leaves monetary policy unaffected.
ELVIRA NABIULLINA:
Now on to enforcing the law that enables transfers of up to 30 million rubles between own bank accounts free of charge, it is true that at first some lenders have been unwilling to comply and deliver. They cite multiple reasons, such as system unavailability, although the law had been discussed for a long time. Clearly, that unwillingness is the desire to lock up customers who now enjoy better transfer opportunities and can easily do without a visit to a cash office to transfer large amounts to other banks — which involves some risk. There is a simple way to do this now, and clients may choose the best bank offering.
That was probably the key reason, and we have worked with those banks to ensure compliance. Most of them have by now removed the obstacles to
QUESTION from Vladivostok (newspaper):
Russia’s policy rate is today very high compared to other countries. This is mainly explained by the need to tame inflation. While that approach delivers in times of crisis, don’t you think it is excessive now? We can see now that mounting inflation defies the high key rate. Such a high rate is putting the economy in harm’s way.
ELVIRA NABIULLINA:
Going by the data, the economy hardly seems to be suffering from shrinking or unaffordable credit. Economic and investment growth is at multi-year highs, and both Q1 and flash estimate for April—May bore this out.
In a further sign of a fast-growing economy, the drop in unemployment has come in recent months with an estimated monthly gain of 100,000 to 200,000 thousand jobs (seasonally adjusted).
As a reminder, last autumn inflation stood at a double-digit number. But for the rate increase, it would have stayed that high — to say the least, but most likely we would have seen more of its rapid acceleration. However, we saw a marked decline in inflation in December and January, and our intention is to ensure that inflation declines moving forward. That is, it is unfair to say that the 16% rate is holding back growth. Should we fail to prevent inflation, driven by overheating, from becoming entrenched, we will face strong negative consequences for both households and growth prospects.
As regards rate comparisons, there is no point in directly comparing the rates across the globe since each country has a specific environment. Many emerging market economies are forced to increase the rates significantly to combat a rise in inflation. That was also the case in advanced economies, as history shows. We remember a time, the early 1980s, when the US had to take its policy rate up to 20% — which was the only way to combat domestic inflation.
QUESTION from Fomag.ru:
In the current situation, some experts say that the current surge in demand for loans is spurred by mere expectations for a further rise in the policy rate. Even at
ELVIRA NABIULLINA:
Yes, such fears are not uncommon. What is rather the current case is that demand for loans is up on the back of news of the rollback of subsidised programmes.
As for an increase in the rates, we give signals for banks to estimate the path of the key rate. Banks can raise their rates if they expect the Central Bank to raise the policy rate, even if it has stopped short of actually raising it. We will see immediate pass-through into interest rates and an impact on lending dynamics.
The feasibility of a more drastic one-time rise in the rate would be determined by multiple factors. We make decisions based on incoming data. If the data warrant a rate rise — as we have warned — the step will depend on inflation dynamics, the labour market, consumer activity and growth. These are the factors, or triggers, we have previously mentioned.
ALEXEY ZABOTKIN:
Those who have been closely following Bank of Russia monetary policy observe very different steps of rate change, both upwards and downwards. This is really dictated by current assessments, the outlook and the level of interest rates in the economy we consider consistent with sustainably low 4% inflation or with inflation returning to 4% over a reasonable timeframe.
QUESTION from RBC:
What options were there on the table today?
And two broader questions. Has the Bank of Russia estimated the impact of the recently announced 2025 tax reform? Given that the tax reform is expected to boost budget revenue, what are the implications for next year's inflation and growth?
My second question is about payments for imports. You have made some comments on that. In Talking Trends, Bank of Russia analysts present a hypothesis: the more problems in import payments, the stronger the ruble. Have you assessed this impact on the exchange rate? Is this behind the recent strengthening of the ruble? What is your overall view of payments for imports in the future? Are we in for a recovery with an overshooting, or are the difficulties likely to persist?
ELVIRA NABIULLINA:
The options we considered were keeping the rate unchanged and increasing it, by either 17% or 18%.
Importantly, last time we had the options of holding and raising the rate, but this time there were more opinions in favour of increasing.
As regards the assessment of tax innovations, we consider taxes only in conjunction with expenditure. Taxes are always disinflationary in nature if taken in isolation from expenditure. Now, a tax rise just reduces the budget deficit, and this contracts the contribution of the public sector to demand and thereby holds back inflation.
Our case is a synchronous rise in tax and expenditure. Therefore, as I have said, we expect the overall effect to be neutral.
While on imports and their impact on the exchange rate, indeed we have seen a certain stabilisation and even contraction in imports as a result of the payments situation. This came as one factor behind the strengthening of the ruble. Among other factors was a lagged increase in foreign currency sales by exporters on the back of high prices in March.
We are going to be making careful assessments, meeting by meeting. Basically, if things are back to normal, the impact will be gradual, as our analysts believe, that is, extended over time rather than one-off. However, the overall problem with payments may spur transaction costs of imports and lead to an increase in prices for a range of imports, adding to inflationary pressures.
ALEXEY ZABOTKIN:
I would like to emphasise that in the past month and a half we have seen a significant upward movement in interest rates. While we have discussed this in terms of deposits, this in fact concerns the entire interest rate curve in financial markets. Its movement is about
QUESTION from Molot (newspaper, Rostov-on-Don)
This May’s frosts and drought in the key agricultural areas of the country are set to do damage to the crop. What is the probability of this translating into price growth, and is this a negative development in terms of inflation processes?
ELVIRA NABIULLINA:
The weather conditions in spring were indeed not too good for the agricultural sector. In the southern regions, it was drier than usual. In May, Central Russia was hit with frosts, snow and hail, with adverse effects on some crops.
As we know, Russia is a key grain producer, so the lower crop forecasts have pushed up domestic and global prices. However, the floating duty on grain exports we have in place lessens the pass-through of fluctuations in global prices to domestic prices.
Now on to the second factor, for all the downward revision in the crop forecasts, the price estimate is still close to a five-year average. That is, we still expect a fairly rich harvest. In terms of effects on inflation, while the crop factor was previously credited with disinflationary effects, it is now seen more of a contributor to inflationary pressures.
Beyond cereals, another factor at play is fruit and berry orchards in Central Russia. In our view, these are unlikely to be strongly affected since the southern regions are unexposed, and they produce a significant part of these products. According to the Government, imports would set off a loss in domestic volumes if needed, so no major implications for the overall rates of price growth are expected.
QUESTION from Invest Future Project:
My question is about commercial banks’ action one week ahead of the Bank of Russia's decision. We now see commercial banks increasingly raising deposit rates. Is this the case of rates growing while the key rate is unchanged? What is the Bank of Russia's position as regards such moves by commercial banks?
ELVIRA NABIULLINA:
Alexey Zabotkin replies right away: the Bank of Russia welcomes this. Indeed, banks are increasingly raising the rates, probably for two reasons.
First, in their rate-setting, banks are factoring in a more extended period of tight monetary conditions. This marks a shift in the prior expectations for that period to be short and something for banks to outwait — and for a rapid decline in the rates to emerge soon. However, the rates are up on the understanding that the tight monetary policy span is here to stay.
There was another impactful factor outside the scope of monetary policy — the free transfers law. I mean the entry into force of the law authorising free transfers of up to ₽30 million each. To retain clients, banks are either offering higher deposit rates or at least are making sure their rates are not much lower than those of competitors.
Overall, this is a very important question. Let me explain why. Let us look into the formation of deposit rates. They reflect, beyond the current level of the key rate, expectations as to its future level. Let us take three-month deposits. Their rates factor in the banks’ projection of the key rate for three months ahead; for a maturity of six months, the projection for 6 months and so on.
True, banks had expected a rate cut until April. In recent months, both our signals and the data banks have been obtaining (just like us) speak of an acceleration in price growth and a rapid expansion in credit; current evidence suggests that the labour market remains tight. Almost all this evidence is included in today’s press release. We are therefore seeing a shift in their expectations towards a possibility that the regulator will raise the rate and keep it high for longer.
This illustrates the importance of our forecast, communication and the rationale for our course of action: banks adjust their interest rates in response to incoming data subject to the regulator's future response.
You are asking an appropriate question. If the June—July data warrant a rise in the key rate, but banks have increased the rates in advance, may this prevent us raising it? All this depends on the level of rates the Central Bank will deem necessary to shape to bring inflation back to 4%. Should we consider our forecast, updated at every policy meeting, and hold off on raising the key rate and signal our intention, banks will reduce their rates, and we will have to account for this. We will understand that banks will not keep their interest rates high, unlike previously, and will make projections accordingly.
At times, the Central Bank and the market have varying rate projections. This occurs in Russia and elsewhere. Yet this will just cause an additional adjustment in market rates.
Summing up, we can say that our monetary policy decisions and key rate decisions are determined by the level of interest rates needed to deliver on the inflation target, whereas financial markets, deposit and loan rates can only anticipate these future actions and adjust to such rates.
You discuss a substantial rise in the key rate. Give us your take on what is substantial: is that 18%, as considered today, or maybe 20%, as in 2022?
And one more question, if I may. If you receive any ominous data, can the Bank of Russia move to increase the rate at an unscheduled meeting before July?
ELVIRA NABIULLINA:
A substantial increase is an increase of one percentage point and over. Let me reiterate, we believe that the case for the alternative scenario involving a rate hike has strengthened. If this is the case and the alternative scenario realises, we raise the rate in July. If any unforeseen shocks emerge, we will hold an unscheduled meeting. However, there are no assumptions for them even in the alternative scenario.
QUESTION from RIA Novosti:
You have said that the Bank of Russia reports the risks of GDP growth substantially deviating from a balanced trajectory. In this context, do you consider the possibility of upgrading GDP growth projections in July? Could you perhaps upgrade your projections for retail and corporate lending as well?
ELVIRA NABIULLINA:
At our policy meeting in July, we will look into the data and revise our projections for both GDP and lending growth.
Flash estimates show that GDP growth is currently in the upper bound, but this has yet to be confirmed.
ALEXEY ZABOTKIN:
The forecast is always updated at each policy meeting. Every forecast builds a holistic picture, and is fully updated due to the interplay between its components.
As regards GDP data, just as the Governor said, there is clearly an upward bias in Q1 GDP thanks to the February 29 effect. February 29 is an additional day of economic activity, that is one more day of output and demand. This impacts the comparison between the first quarter of the leap year and the first quarter of the previous year.
The contribution of this impact cannot be measured before we have data for subsequent months, but its contribution is significant. This means Q1 data alone are not enough to say that the economy is on a path of significantly higher growth this year than previously assumed. By the end of July, we will have received sufficient data for both April and May, as well as flash readings for June, to be able to make a more accurate estimate for Q2 economic activity, taking into account all these effects.
QUESTION (Anna_finance Project):
We are in a unique position: on the one hand, we know that people are increasingly saving more, but, on the other hand, they are spending more. Whereas there was talk of people taking out loans when they are short of money, there is now talk of high earners taking out loans to make big-ticket purchases they could not afford otherwise, which gives a further boost to inflation. This brings up the following question. Are we in for an extended multi-year period of a two-digit key rate and two-digit rates in the financial system?
My second question is on a different subject but also relates to inflation drivers. What is the progress with the law that would allow banks from friendly states to open branches in Russia? It would be great if imports would run smoothly and thus slow inflation.
ELVIRA NABIULLINA:
Let me first answer the second question. This is in the works: we have launched the initiative to allow foreign banks to open branches in Russia. Its interagency approval pending, we hope to have it is soon, relatively soon, submitted to the Government.
As for the first question, I would like to ask Mr Zabotkin to comment.
ALEXEY ZABOTKIN:
The growth of lending has been decelerating. This is less evident from the annual data, but even the annual movements in both corporate and retail lending are now lower than six months ago. In terms of seasonally adjusted month-on-month data, growth in the first half is markedly lower than in the middle of last year and in the autumn.
Therefore, it may not be fully accurate to say that lending has been insensitive to the tightening of monetary conditions.
Yet why is the expansion in consumer lending still strong? One important factor is related to accelerated growth of incomes and changes in the level of income of wide groups of households. Some of them might not even have access to lending before but can now obtain personal and mortgage loans. This is a significant but one-off effect owing to a drastic change in household incomes. However, sustainable demand for consumer loans directly depends on the ratio of interest rates to inflation expectations. Inflation expectations remain high. Although they have come off highs reached in spring 2022, they are still much higher than in 2017, 2018, and 2019, when inflation was 4%. Inflation expectations will decline as inflation moves back to 4%. This will work to reduce households’ perceived estimate of interest rates and will help moderate growth in lending even with a lower level of nominal rates. This is however an extended process that spans quarters rather than months.
QUESTION from Moskovsky Komsomolets:
Preferential mortgage programmes are due to end from 1 July. The Bank of Russia has on many occasions supported this decision of the Government. At the same time, construction is seen as an economic locomotive. Some research brings evidence that the construction sector is a direct employer for almost every tenth Russian. Has the Bank of Russia made any calculations as to the implications of the rollback of subsidised loans for the domestic economy and household debt? Is the expected impact manageable? Could it trigger a housing market crisis — which is much spoken by housing market analysts, and could it drive up bankruptcies among industry players, corporate and personal?
ELVIRA NABIULLINA:
The picture is being blackened to retain large-scale subsidised mortgage programmes, which drive up prices and profit margins in the construction sector rather than boost housing affordability, as we have seen. We expect mortgages to continue growing, but its 30% and higher pace should give way to a more balanced expansion. Our April estimate puts this year's growth at
We have sounded concern multiple times about price distortions in the primary and secondary housing markets, resulting in mortgage borrowers overpaying for houses despite seemingly low mortgage rates. The price difference between the primary and secondary markets is overly large. Mortgaged homeowners would struggle to sell their properties without a huge discount. Now, certainly, commercial mortgages are becoming cost-prohibitive to those falling outside the scope of subsidised programmes.
As for the effects on the construction sector, we believe that it is on course to grow and there are no market failures in sight. Furthermore, as I have mentioned, it has accumulated sizeable profits and boasts a safety cushion. Now while on those employed in construction and related sectors, we do not expect any massive layoffs. More so, in current labour market conditions, there is huge demand for workforce. That is why the gloomy picture being painted is far-fetched, I believe.
QUESTION from Zabaikalye TV channel (Chita):
The Bank of Russia’s inflation target relates to the annual inflation rate which reflects price growth for the past year. However, publications and presentations by Bank of Russia officials are increasingly focused on current rates of price growth that capture more recent developments. Is it possible for the Bank of Russia to change this indicator that determines the target?
ELVIRA NABIULLINA:
Not really, we do need to change the target. There is no contradiction here between the inflation target — which we measure in annual terms — and the heavy focus we place on current rates of price growth in our rate decisions.
Annual inflation is inflation over the past 12 months, which makes this indicator backward-looking. In this way, annual inflation as of May 2024 is price growth over 12 months since last May. It is also imperative we have the best measure of current price growth rates, sometimes called ‘inflationary pressures’. The basis for their calculation is either monthly or sometimes three-month rates of price growth, seasonality adjusted and annualised. What is ‘annualised’? Monthly rates are multiplied by 12. Accordingly, three-month rates are multiplied by four to see what the annual rate of inflation comes in if prices rise at this month’s or three months’ pace. This is how we estimate current inflationary pressures. In other words, current inflation estimates capture current economic developments, but the resulting estimate should be based on actual annual inflation over long time spans. An inflation rate averaging 4% is considered close to the target.
This is why we see no need for a change in the inflation target, but more prominence in decision-making will be given to current rates of price growth.
ALEXEY ZABOTKIN:
Importantly, if we have managed to maintain current price growth at close to 4% over 12 months, annual inflation should come in at 4% by the end of 12 months. This is the central point: it is actually the same thing, but the measure of current price growth is a picture of current economic developments, while annual inflation shows what happened in the economy over the past 12 months.
QUESTION from Frank Media:
Revisiting the subject of consumer lending, you said yesterday that growing incomes have so far thwarted the Bank of Russia's efforts to cool down this market. Do you leave open the possibility of changing your approach to deliver on this goal? Perhaps there are other measures in the Central Bank’ toolkit, aren’t there?
And question two, please. Should the Central Bank fail to stamp out accelerating inflation and should the present GDP growth model run its course, would we face any stagflation risks, and how strong would they be?
ELVIRA NABIULLINA:
Consumer lending is indeed growing faster than we expected. We had counted on a more substantial deceleration. Just as Mr Zabotkin has just said, as compared to the peak of price growth at the end of last year, those rates were much higher. That is, the key rate is an efficient instrument to be relied on in the future. If we need to revise the key rate to reach 4% inflation and put loans on a path of balanced growth, we are ready to do so.
I would like to ask Mr Zabotkin to comment on the risks question.
ALEXEY ZABOTKIN:
A hypothetical scenario of a central bank failing to make appropriate decisions assumes the emergence of stagflation, as was the case across the globe when central banks failed to stamp out accelerating inflation in time.
Therefore, the decisions on the key rate we intend to make are meant to put the economy on such a path when credit growth, aggregate demand and ultimately inflation are all aligned with its capabilities and eventually lead to low inflation and balanced growth.
QUESTION from Russia 24:
On May 21, the EU Council approved the use of net profits from the frozen Russian assets. Does Russia intend to respond with some measures? If it does, what are these measures? Are there plans to return these funds at some point in time?
ELVIRA NABIULLINA:
The response is being considered by our senior leaders.
QUESTION from Vedomosti:
What is the regulator’s position as regards some Russian banks owned by foreign groups that are reducing lending not because of the Bank of Russia but because of foreign regulators? Also, you say that there were more opinions in favour of a rate rise today. Can you tell us about the distribution of voters?
ELVIRA NABIULLINA:
Let me first take the second question. We do not disclose information about how we vote, but the decision was made by broad consensus. We looked into the case for both the first and the second options. However, the broad consensus was for the key rate to remain unchanged.
As for foreign-owned Russian banks, I can only say that they are really under strong pressure. The Russian regulators are not taking any measures to limit their operations.
QUESTION from Law and Invest Project:
This rate decision may have come with the most dramatic expectations in recent times, and I recall that one year ago the Central Bank also stopped short of raising the key rate, watching price movements and lending trends. Can this decision entail the need for a more drastic and higher rate increase thereafter? What is the Bank of Russia’s take on this?
ELVIRA NABIULLINA:
Let me revisit the rationale for our course of action. There were two scenarios on the table. There is indeed uncertainty as to which scenario is currently at play. Some arguments speak for the baseline scenario, which assumes a resumption of disinflation. There are factors I have mentioned, including the tightening of monetary conditions, which is being translated and will have for some time translated into the market, the end of mass subsidised programmes, and others. However, it is possible that we are already in a scenario where inflation has either become entrenched at relatively high levels or is rising. This is to be confirmed by incoming data. In that case, we are really ready to raise the key rate, and the increment will depend on the data.
Ahead of our next policy meeting, between June and July or rather by the end of July, we will have received a fairly large array of data to enable an informed decision.
ALEXEY ZABOTKIN:
This and next meetings are spaced further apart than usual. Actually, many sets of the expected amount of data will cover two months rather than one. Accordingly, on July 26 we will have a more detailed picture than today of the factors at play. Therefore, we wait until July 26.
QUESTION from Banking Review:
What action is the Bank of Russia going to take to saturate the digital financial asset market with liquidity?
ELVIRA NABIULLINA:
It is true that the digital financial asset market is quite new, but it is on a solid growth trajectory. It is true that the bulk of liquidity today is with exchanges and brokers, while digital assets are almost isolated from them.
More so, the digital asset market itself is also fragmented. A digital asset issued by one of the eleven platforms we have will not be sold on the other platforms. This is an issue, and liquidity should flow across market segments and within the digital asset segment. We believe it is imperative to ensure that a digital asset can be purchased through a single window regardless of its issuing platform.
We already have two independent exchange operators: the Moscow and Saint Petersburg Exchanges. They are capable of building integration with relevant platforms and information system operators. They have yet to realise this, but we hope that these market solutions are delivered.
In addition, we have been in touch with the market community and have discussed the possibility for broker or custodian customers and other conventional market participants to be able to buy digital assets directly via mobile applications, which they are familiar with. This is likely to involve a draft law, and we are discussing the draft. We also would like professional market participants — brokers and independent exchange operators — to have the authority for customer identification. The relevant draft law is already before the Duma. We hope that it passes and helps solve what you call the liquidity saturation problem.
QUESTION from Profinansy Project:
Under President Putin’s plan, domestic stock market capitalisation is to double by 2030. The Central Bank has called this plan challenging, but attainable. Here is the question. What is the primary source of growth in capitalisation, as seen today? There are two ways: more IPOs and rising prices of the floating shares. Which do you think is the more significant contributor to growth in capitalisation by 2030, and what is the Bank of Russia's role in this?
ELVIRA NABIULLINA:
I believe that we will act jointly with the Government in all the areas, for there is no all-in-one solution to boost market capitalisation. This can be done through incentives, measures targeting both issuers and investors, and the development of instruments as such to make them easy to use.
Current growth is higher than in past years. We see higher returns, and higher dividends can be paid; this attracts investors and can boost stock prices.
Still, it is probably very important to attract new issuers given the current rise in IPOs, which is nowhere near a boom, small in volume and not comparable with the number of IPOs in the past. Also, the stock that enters flotation is not always large.
This is why we need incentives for issuers, considering that major companies, industry leaders, opt out of the capital market.
Such impactful incentives could include a recalibration of government support policies. They are currently essential to the economy. I have explained our position on subsidised programmes: we should downsize them, but they still exist. Then, as long as they exist, they should not encourage companies to rush for bank loans, considering that their current focus is encouraging debt financing of investment. In other words, we are talking about subsidised loans, loans backed by development institutions.
In our opinion, incentives should target issuers as a matter of priority as long as the state wants to help them enter the capital market. Some tax preferences are also possible. These can be, for instance, investment deductions for companies investing out of their profits. In the case of borrowings for investment, we need to analyse the feasibility of equivalent capital grants, for a company raising capital in the market. In other words, we are not discussing the expansion of subsidised programmes, but rather their transformation that would make it profitable for companies to enter the capital market and raise capital.
What certainly matters is incentives for investors. We have seen high demand among investors with much oversubscription, but current flotations remain small. If there are more issues and larger issues, it is imperative we attract investors. The key measures may even focus on the predictability of dividend policy and information transparency rather than financial matters. We are aware that some of this information is sensitive and undisclosed due to sanctions. However, investors should receive the information to enable them to make decisions on buying or selling stocks.
Now, the third point is protecting the rights of minority shareholders, investors buying securities on stock exchanges.
QUESTION from Domclick Magazine:
As mass-scale subsidised mortgage lending ends, market-based mortgage loans are expected to become more affordable. How can this be achieved?
And another question, please. What is the Bank of Russia’s position regarding the extension or cessation of the IT Mortgage Programme and the increase in Far Eastern Mortgage rates?
ELVIRA NABIULLINA:
We believe that if the volume of subsidised mortgage loans is limited and if we deliver on the 4% inflation target, the costs of unsubsidised mortgage loans are set to decline considerably. If the volumes of subsidised mortgage remain high, commercial rates will be higher too.
Let us recall the time of inflation at close to 4%, a relatively long span of five years. We then saw the volume of unsubsidised mortgage increasingly growing, with rates sitting at about 8%. That came without the need for huge subsidies from the budget. Consequently, what is needed is price stability for a certain period of time as well as withdrawal from market-distorting programmes. As a result, we have a reduction in market rates. Our estimates suggest that if the inflation target is achieved in 2025, this will happen after 2025 provided that the volume of subsidised programmes is really kept limited.
As for the IT and Far Eastern Mortgage programmes, it is up to the Government to decide which amounts to allocate for which: the Family, IT and Far Eastern Mortgage programmes. Our decisions are rather determined by their amounts. Nationwide, the Far Eastern programme is not very substantial and does not have much impact on key rate decisions. If we acted as the Government, we would make sure there are no distortions in the housing market due to these programmes. The participating regions are reporting a much larger price gap between new and existing housing than regions outside the scope of the programmes. That is why the imbalances in regional markets should be watched closely for their potential harm to mortgage borrowers.
Thank you for your questions.