Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 25 October 2024
Good afternoon,
Today, we have made the decision to raise the key rate to 21% per annum.
Price growth has accelerated since September. Inflation expectations have risen as well. Lending has continued to grow rapidly. Due to limited labour resources and high capacity utilisation rates, enterprises have been increasingly experiencing problems with expanding their output of goods and services. Moreover, the Government has announced an additional increase in budget expenditures this year, as well as a more considerable tariff indexation and a rise in the recycling fee. Some of these factors have already translated into high inflation in 2024 that is to reach
I would now dwell on the reasons behind our today’s decision.
Firstly, inflation.
Overall, we can see no signs of its slowdown. In September, current price growth sped up again, largely in terms of its underlying component. Core inflation, one of its indicators, exceeded 9%.
Inflation expectations increased significantly, reaching the highest level over the year among households. Businesses’ price expectations were up as well, most notably among retailers. This is yet another indicator of elevated price pressures caused by demand-side factors.
In the next few months, price growth rates will also be affected by a recycling fee increase. This will have a substantial impact on inflation, given a large weight of passenger vehicles in consumer expenditures, which accounts for 4.6%.
Another proinflationary factor is the rise in housing and utility tariffs and rail transportation rates at a pace that is significantly above the inflation target. This is another argument in favour of additional tightening of monetary policy. Taking into account our decisions, annual inflation will equal
Secondly, the economy.
The economy continued to grow in 2024 Q3, although at a more moderate pace. In the previous statement, we noted that the slowdown in economic activity might be associated not so much with cooling demand but rather with more severe constraints preventing companies from expanding the output of goods and services. Strengthening inflationary pressures are an additional evidence that the slowdown in economic growth is largely associated with supply-side constraints rather than with the demand dynamics.
As regards demand, its increase slowed down somewhat in July—August in terms of consumption and investment. However, preliminary data on economic activity for September suggest that this process has not become sustained so far. According to our Monitoring of businesses and the evidence from our regional branches, consumer activity remains high. Monitoring of businesses also shows that companies expect a further rise in investment activity. Another factor supporting demand is the announced rise in budget expenditures this year in the amount of ₽1.5 trillion.
As to an increase in the output of goods and services, the problems hindering this process have become more acute. Available production capacities and labour resources are being used increasingly intensely. The labour market remains tight. Moreover, according to a recent business survey, the problem of staff shortages has become even more severe. The seasonally adjusted unemployment rate in August stayed close to its record low of 2.5%, while wages were still rising faster than labour productivity.
There are also other supply-side constraints that are both of a more general nature and related to particular industries. In addition to staff shortages, companies have been increasingly facing other challenges, such as logistics bottlenecks and more complicated supply chains. As regards constraints in specific industries, they have affected the oil and gas sector due to the voluntary production cuts under the OPEC+ agreements, as well as agriculture which suffered a decline in yields caused by severe weather conditions.
Even as demand is cooling somewhat, the output gap in the economy does not diminish due to persistent supply-side constraints, which is exactly what is generating elevated price pressures.
Now, as regards monetary conditions.
Since our previous meeting, the yield curve of federal government bonds has shifted upwards across all maturities. Higher long-term interest rates suggest that market participants’ doubts that inflation will return to the target over the medium term have intensified. In other words, their inflation expectations increased again. For us, this means that monetary policy should be more restrictive.
Overall, monetary conditions have tightened. However, given rising inflation expectations, the tightening of monetary conditions in real terms has been less considerable than that reflected in nominal interest rates. I would like to stress that the level of tightness should be measured exactly this way, that is, by subtracting expected inflation rather than its actual rate over the last 12 months from the level of interest rates.
So far, we cannot observe a notable slowdown in overall credit activity. The fast increase is mostly accounted for by corporate lending. This segment is less sensitive to key rate rises as a considerable proportion of loans are issued under subsidised programmes, for project financing, or to complete investment projects and government supported projects that were launched earlier. Nevertheless, the demand for loans at market interest rates has been weakening.
Retail lending has started to respond more notably to the key rate increase, tougher macroprudential measures, and the termination of the non-targeted subsidised mortgage programme. The monthly growth rate of the retail loan portfolio has halved compared to May—June.
Households’ demand for time bank deposits was up in August and September. As before, rising incomes allow people both to consume more and save more. Our today’s decision will increase households’ saving activity.
In our updated forecast, we have raised the estimated growth rate of lending to
Now, I would like to speak of external conditions.
Global economic growth has been decelerating. This implies a more moderate increase in external demand for Russian export goods. There are two factors having opposite effects in the oil market. On the one hand, rising tensions in the Middle East have pushed up prices. On the other hand, a slower expansion of the world economy has been decreasing the demand for commodities. We have reduced the forecast of oil prices for this year by $5 to $80 per barrel. The forecast for 2025 has been left unchanged. As to the forecast of the current account balance, there have been no significant changes over the three-year horizon.
The updated forecast of the balance of payments takes into account actual data. In 2024 Q3, the value of exports remained stable, whereas the value of imports exceeded the expected level, which has affected the ruble exchange rate. In the future, the key rate increase will be containing imports by cooling domestic demand.
I would now dwell on the risks to the baseline forecast.
Broadly, the range of these risks has stayed the same. In the first place, these include the demand and supply gap caused by persistent demand overheating or by an increase in constraints limiting the capabilities to expand the supply of goods and services, primarily because of staff shortages. Furthermore, there are still risks related to foreign trade, geopolitical events, and inflation expectations.
As to disinflationary factors, these are a faster reduction in demand and a more considerable increase in the economy’s potential and labour productivity.
Winding up, I would like to comment on the future path of the key rate.
The economy has been facing serious shocks over the past three years. Enterprises have been forced to rearrange their production and logistics chains or even establish new ones in many cases. These conditions inevitably entail sharp changes in relative prices, which enables businesses to adjust to the new reality rather quickly. Over the past three years, prices have risen by 30%. However, the structural transformation in the economy cannot any longer explain the price increases over 2024. They were induced by more severe overheating of demand that was expanding faster than supply. Amid labour shortages and high capacity utilisation rates, any further attempts to refer to the increase in prices as a prerequisite for structural transformation will cause a dangerous high-inflation situation in the economy that will create considerably more problems than benefits. In other words, price rises will become a factor constraining the development rather than a way to adjust to the new environment.
The Bank of Russia remains determined to return inflation to the target of 4%. Despite a rather notable increase in the key rate, annual inflation this year will be twice as high as the target. However, this does not mean that the key rate is inefficient. If not for its increase, inflation would have been much higher. Anyway, how can that considerable deviation of inflation from the target this year be explained? Amid the heightened uncertainty of recent years, the effects of many mechanisms in the economy have changed. We see several reasons why the response of inflation to the rise in the key rate has become less pronounced.
First of all, this is the increased inertia of inflation expectations due to the fact that the inflation rate has been exceeding the target for four years already. The longer the period of the deviation of inflation from the target, the less confident households and businesses are that it will return to its low levels. This is reflected in their behavior: propensity to consume, invest or save.
The second reason is the impact of expansionary fiscal policy, including as a leverage for taking out loans for those households and companies whose incomes grow due to fiscal spending.
The third reason is a range of factors in the banking sector. Regulatory easing measures made it possible for banks to expand lending aggressively neglecting the need to maintain a more liquid asset structure and to additionally accumulate capital buffers.
Finally, this is the Bank of Russia’s inaccurate communication at the beginning of the year. Our forecast assumed a reduction in the key rate following the slowdown in inflation. However, that was largely perceived as our intention to cut the key rate in any case. This motivated households and businesses not to reduce their demand for loans.
These are very different factors, but all of them have had the same effect. Consequently, overheating in the economy has turned out to be stronger, which has led to faster price growth. Therefore, to achieve the inflation target, we will be responding to proinflationary risks in an even more conservative manner. The level of tightness of our monetary policy will be determined by the objective of bringing inflation down to the target.
We will need a considerably higher key rate path than we assumed in the July forecast. The key rate will average 17.5% in 2024,
Thank you for your attention.