Dear colleagues, good afternoon. We are starting the press conference by the governor of the Bank of Russia, Elvira Nabiullina, and the deputy governor, Alexei Zabotkin. And to begin with, we will hear the statement of the governor following the board of directors meeting.
Thank you. Good afternoon. Today, we have made the decision to cut the key rate to 14% per annum. We consider the observed acceleration of price growth to be temporary. We still assess underlying measures of inflation in the range of four to 5%. Businesses expectations about demand declined in June as is evident from high frequency data. This might suggest more moderate demand in the future which will limit the opportunities for companies to pass through higher costs to prices. We have taken into account July's surge in households inflation expectations in response to the developments in the fuel market which might trigger second round effects on inflation. In view of this and a more expansionary fiscal policy stance, we need to ease our monetary policy more smoothly. Accordingly, we have revised the key rate path for 2026 and 2027 upwards. I would now dwell on the rationale for our today's decision.
Firstly, inflation. Price growth accelerated in June, which was largely provoked by the situation in the fuel market, as well as growth in fruit and vegetable prices after their sharper than usual decline in spring. High frequency data suggest that increased fuel prices have begun to feed into prices across a broad range of goods and services. Expectedly, this has translated into inflation expectations surging in July. Petrol is a salient item accounting for a significant portion in households regular purchases and company's costs. As the situation in the fuel market stabilizes, inflation expectations are likely to go down. They demonstrated similar dynamics in response to a higher VAT adjusting downwards rather soon after their short-term spike. We have not changed our estimate of underlying inflation and assume that it will stay close to the current level in H2 2026. Given the realized rise in fuel prices and the subsequent increase in prices for other goods, we have revised our inflation forecast for this year upwards to 6 to 7%. After the effects of transitory factors waned and as a result of the monetary policy pursued, inflation will return to 4% in 2027 and stabilize at the target further on.
Secondly, the economy. As we expected, GDP demonstrated positive dynamics in H1 2026 after its decline in Q1 26 which was associated with calendar and weather effects. Economic activity expanded moderately in Q2 26. These assessments rely on industrial production data for June. Corporate investments were recovering. Growth in household consumption sped up somewhat which was partially attributable to one-off factors including pent-up demand from the beginning of the year when consumption was subdued. Further developments in the economy depend on a number of factors. The first one is the level of good supply. In our baseline scenario, we assume that companies will restore their production capacities before the end of this year. The second factor is demand dynamics. Businesses expect demand growth to slow down as is evident from high frequency data. Given the temporary reduction in production capacities in the economy, we have revised our GDP forecast downwards. GDP will expand by up to 1% according to our estimate. The forecast for the next few years has remained unchanged. A gradual easing in the labor market will contribute to a slowdown in price growth. According to the Bank of Russia's regional offices, companies report an increase in staffing levels primarily where labor mobility is higher.
Thirdly, we assess monetary conditions as moderately tight. Money market rates and federal government bond yields have risen. However, taking our inflation expectations into account, the tightness of monetary conditions in real terms has decreased somewhat. Household saving activity has slightly weakened with its structure changing. Although deposits continue to grow, their proportion has been declining gradually. Contrastingly, the share of funds invested in financial market instruments and real estate has been expanding steadily. The increase in corporate lending accelerated in June. The retail segment recorded a rebound driven by both mortgages and unsecured consumer loans. Generally, lending dynamics are currently consistent with our forecast. While money supply growth has rather exceeded it so far, as you know, money supply has two main sources which are lending and the budget balance. The fiscal system's actual expenditures are now running considerably higher than in previous years. Accordingly, the overall dynamics of budget spending will likely be higher this year and therefore the structural deficit will be larger than assumed in the current projections. This means that all else being equal, monetary policy should ensure a more moderate rise in lending compared to the growth rates observed in Q2 26.
As for the medium-term horizon, the government has not announced fiscal policy parameters yet. Nevertheless, it is already known that the primary structural deficit is most likely to persist through 2028, due to which our macroeconomic forecast may not rely on a zero budget balance. The government continues discussing fiscal policy parameters for the next three years. The fiscal policy stance is one of key assumptions for us and therefore we have updated our forecast taking into account our own estimate of the future path of the federal budget returning to a balanced structure. The revised key rate path reflects this estimate. Now I would like to speak of external conditions. Inflation has continued to accelerate worldwide including due to the events in the Middle East forcing many foreign central banks to shift towards monetary policy tightening. Global crude prices remain volatile, demonstrating a strong response to geopolitics. The unfolding situation shows that if the Middle East conflict ends, the premium for geopolitical uncertainty is likely to be excluded from crude prices rather soon. As a result, the latter will return to levels which are fundamentally justified in terms of the balance in the global oil market. Taking these factors into account, we have decreased our forecast of crude prices by $5 per barrel over the entire forecast horizon. I would like to reiterate that the crude price affects the parameters of our forecast only to a limited extent since the fiscal rule smoothes the impact of its fluctuations on the economy. The balance of foreign trade in Q2 26 was below our expectations which was associated with lower exports and higher imports including due to a stronger ruble.
I will now speak of risks. Overall pro-inflationary risks prevail over the forecast horizon according to our estimate. As before they include a slower than expected easing in the labor market. Budget parameters remain a major factor of uncertainty as I have already said. We expect government to officially announce them in September after which we will update our forecast. New risks are largely associated with the reduction in production capacities in certain industries. If supply constraints persist for longer than assumed in our baseline scenario, this may accelerate inflation including through the response of inflation expectations and second round effects. On the other hand, the temporary contraction in production capacities might have disinflationary effects as well. If business's sentiment and consumer confidence decline, notably due to this factor, aggregate demand dynamics will be much more moderate.
Winding up, I would like to comment on our future decisions. Considering new inputs regarding budget parameters and possible second round effects from the earlier rise in prices, the key rate path should be higher. We have increased its range to 14.5 to 14.6% for 2026 and 10.5 to 12.5% for 2027. There are several possible scenarios depending on how the situation will be unfolding in the future. Whatever the scenario, the Bank of Russia will make its decision so as to bring inflation back to 4% over the forecast horizon. Thank you for your attention. Now, dear colleagues, we are ready to answer your questions. Please introduce yourselves and identify your agency. Daniel, please.
Good afternoon. Daniel Sitra, TASS agency. Has the Bank of Russia considered during the board of directors meeting raising the key rate and lowering it doesn't mean that central bank can see that the situation in this or that market is normalizing. Thank you.
We have substantively looked into two options: to keep the rate and lowering it by 25. There were individual proposals to raise it. But once again, we seriously considered two options because indeed we have analyzed the way the fuel market is developing. And first and foremost, the petrol market is what they describe as the supply shock and the monetary policy responds to such shocks in case they don't have pronounced second round effects and permeate into the stable inflation which definitely depends upon the longevity of such shocks. Whatever we are seeing, we see the way the government is taking measures to stabilize situation in the petrol market and actually we have very attentively listened to the reports coming from our territorial and regional offices. The situation is quite diverse everywhere but in many regions, based on the reports from our territorial offices, situation becomes stable. So in our baseline scenario, we assume that the capacities are going to restore themselves gradually until the end of the year. Thank you.
Good afternoon. Could you please tell us what is the way that the Bank of Russia assesses the recently newly introduced European Union sanctions? Will they somehow impact the banking sector? And the business representatives recently suggested that the inflation target should be raised. Is the Bank of Russia ready to consider this proposition? Thank you.
Well, this country's banking sector for several years has been existing under the sanctions and a considerable number of banks are under the sanctions and actually all of the banks that haven't been under the sanctions are ready to embrace this kind of the evolution. Well, we assume that like during the previous sanctional waves, everybody's going to adjust it particularly since the banking sector has quite resilience and sufficient reserve capital. So, we don't see any major problems here. Now, as far as the changing of the target is concerned, we consider that in the future it would be only possible to consider bringing it down. We don't look at it as raising it because everybody's going to lose from it. It's an illusion that the rates are going to go down as the result of it being brought up. If we raise the target, the rates will only follow suit. The market rates will only follow in this wake. So we consider that it is very detrimental to the economy. Moreover, possible review of the target because one doesn't reach it simply undermines the faith in the inflation targeting and the monetary policy. So you must not sacrifice these things. Not at all.
Dear colleagues, please Anatoli in the last row.
Good afternoon, Izvestia newspaper. What is the way the regulator assesses the external factors including the newly spiraling Middle Eastern conflict when making its decisions about the key rate? How does that impact your projections?
Well, it is true that external factors we do analyze as important lever that affects our decisions. Of course, various restrictions in the passage of vessels do affect inflation in several ways. On the one hand, the global energy prices growing brings to a stronger ruble, better export prices. This is a disinflationary factor. On the other hand, the longer the supply disruptions remain through the straits, the stronger are the pro-inflationary risks in terms of prices for our imports. Now, in terms of how long that conflict shall remain remains an uncertainty, but I would like to say that we currently attribute less significance to it compared to 3 months ago.
And the fact that supply disruptions from the Middle Eastern regions impacting the global economy, I believe, is something that is hard to argue against because a number of the biggest central banks have switched to raising their key rates or are thinking to begin this path in the near future. Thank you.
The next question comes online from Victoria Chubin, Dunkeros.
Good afternoon. The central bank several times has concerned that the situation with fuel may impact inflation and make the respective decision. Now the ruble exchange rate is linked to such indicators. So what is the way that the more expensive petrol will impact the national currency exchange rate and does the central bank see any risk which will threaten the stability of the ruble?
Now in terms of there being a direct dependence between the cost of petrol and the exchange rate, it is not there. Temporary expansions of the imports of petrol may temporarily strengthen the demand for foreign currency. However, the scale of such transactions is insignificant in the meantime if you compare it with the general foreign trade turnover. So this impact is not going to be strong upon the exchange rate.
Maria Felushna, Bitcoin. If the contraction of the production capacities in certain sectors that you're referring to in your press release, for example, remains long until the end of the year and at the same kind of pace, will the Bank of Russia then consider raising the key rate?
We will review the way situation is evolving generally. Undoubtedly any production capacity contraction is our decision making factor but not the only one which accounts for our key rate decision. Once again, one will have to take a look at everything comprehensively, but against all things being equal, that will definitely limit the space in the room for further key rate reduction.
Good afternoon. Igor Shipko, Eager Shimco Media Project. Thank you very much for your work. I've got a methodological question. In October last year, you said that in case the inflation target was not reached and you would be forced to raise the key rate, one will have to act in a much tighter and stronger way and raise the key rate. So we interpreted that you will have to then go above the previous 21%. Are we understanding it correctly? And has anything changed since then?
Well, look, our updated forecast, we have updated the forecast today assumes that in order to slow the inflation down, it's enough to keep the tightness in terms of the monetary conditions that we are currently seeing. And you know that the policy the stance that we're having led to a situation whereby over the past 18 months the stable inflation from two-digit rates went down to almost double annualized. It's impossible to completely exclude the possibility of us raising the key rate. We have always been saying it that we will pursue the kind of policy which is necessary in order to go back to low inflation. If all of a sudden circumstances change and call for it and basically we will raise the rate to the level that is necessary and I hope that our action back in 2014 and in 2022 as well as in 2023 and 24 should leave no doubts. But that calls for a totally different scenario other than our current baseline one with additional long-term shocks on the supply side which not on a temporary basis but on a long-term basis are going to undermine our output capacities. And so if that takes place on a permanent basis that would require a more moderate demand in the economy this year, next year. But I shall underscore it again. This is not part of our baseline scenario, but to really incorporate this long in advance and in a preventive way to really jolt this rate upwards. There's no sense in it. If this scenario plays out, we will do what is necessary to ensure price stability.
Vimas of Communist newspaper. I wanted to follow up on the fiscal factor considering your press release the understanding and the fiscal policy since the previous meeting hasn't really strengthened the same kind of assessment in terms of the incentivizing expenditure impact, the structural not zero deficit but on the other hand throughout this period of time the ministry of finance evidently has updated the current year's budget and I'm sure that you have been discussing with various adjustments for the current year. Is it true that all of the decisions are going to be made about it in October once all of the parameters are known?
Let me explain. I have already stated it that previously we have included a zero deficit like what was previously announced with respect to the budget. But the ministry of finance has already announced that most probably until the 2028 inclusive is not going to be there. We cannot really put it in. So this time we have made our own estimate of a possible trajectory of the primary structural fiscal balance because the actual trajectory may follow a different path and we know that the minister of finance and the government is currently debating it will most probably will make an announcement in September most probably closer to October but we have reflected based on what we are saying that actually these this year the expenditures are running considerably higher than what was mentioned in the original plans. So for this year the primary structural deficit we do 2% next year 1% and in 2028 half a percent. Once again this data is our assessment which will be further reviewed and updated once the government presents its updated forecast. Our baseline scenario as one includes and shows this kind of a trajectory. Thank you.
Next question comes online from Victoria Sharina, Law and Finance. Victoria, go ahead please.
Good afternoon. I would like to follow up on the budget deficit like you mentioned it turned out to be quite an extensive one and recently several government bond auctions didn't take place at conditions and levels acceptable to minister of finance. Please tell us if the Minister of Finance won't be able to borrow from the market at an acceptable rate where the money is going to come to cover the deficit and what kind of possible option of covering that deficit will bring the bigger risks to inflation and the household savings and is it possible the situation may unfold where the Bank of Russia will have to lower the rate not because the inflation will demonstrate a stable decline but because servicing the government debt will become too expensive. To what extent Russia currently is far from such a scenario.
Well, thank you very much. The deficit funding tactics in terms of the deficit is the minister of finance remit but you should agree that what we've been able to see over the past several years minister of finance demonstrates a very flexible approach to its borrowing policy selecting the tactics in its borrowing very prudently. Now the impact of inflation upon or the budget spending upon inflation at a first glance is being defined not by the methods used to fund the budget deficit but the size of the budget deficit and certainly in order for us to take into account the budget from the point of view of its consolidation parameters. We ought to have as soon as possible an understanding of how the budget deficit is going to be reduced because this process is disinflationary indeed. Now with regard to government debt service saying that it might become too expensive. No, we don't believe that this situation may happen for Russia. There is no problem like that because we've got relatively low level of government debt and that is one of the reasons as to why the government debt should be under control and one should avoid seeing it grow because a moderate debt burden is part of responsible financial policy. Be it for any borrower, a government, a business or a household because we see through the cases in other countries that where you see a high level of government debt such countries are running the risk of facing limited flexibility in its macroeconomic policy.
It's just that a lot of time has gone since 1990s but in the end of 1990s that was exactly the situation Russia was in and that has seriously undermined our macroeconomic stability back in 1998.
Good afternoon, Popov Media Pro Finance Invest Future. My question is this. It's a little bit about pain. The share market, the stock market recently has seriously plummeted and often investors felt a lot of pain. And so I would like to ask you, is it some sort of an indicator of a recession? And generally speaking, the market decline that we've observed lately, does it affect your rate decision in any way? To what extent the market must fall so that the financial stability should demonstrate that it is not stable, something like that.
We scrutinize whatever is going on in the stock market. It is indeed living not through the happiest of times but in terms there being any direct impact upon it I mean related to inflation and as our decision-making factor we haven't considered it this way. Now in terms of from the point of view of overall financial stability it seems to me that there are no reasons to be concerned. Yes, the stock market is currently going through the period of volatility. I believe that most of the problems are related to a growing uncertainty with regard to the future financial performance of the issues and the future dividend policies. But the need to respond to the risk related to financial stability is just what we don't see. We're going through absolutely different kind of circumstances, absolutely different dynamics even if you compare it with a period when certain additional measures were necessary.
Dear colleagues, please Arena.
Ahmed Money Doesn't Sleep channel. We see that capital spending by businesses for investments have gone down about 14% year on year and the government also notes that by next year it would be worth starting an investment struggle although against the reduction of the key rate like today 14% many businesses still find it not comfortable to continue their investment program. We see that many public issues do reduce the investment program. So my question is what is the way that the central bank is assessing the current environment and against which rate one could expect that we may reach a new investment cycle. Thank you.
While it is true that the investment activity is quite subdued, although we were saying that during Q2 it somewhat rebounded compared to the first quarter this year. However, that would not be correct to explain everything by the key rate. First of all, the readiness and willingness to invest come not only from the level of rate at which the funds are being borrowed to invest because nevertheless the main source of investments in Russia's case in many countries as well are businesses own funds and apart from the availability of financial resources to invest them also incentives and motivation to invest are important. And easy predictability, understanding of the future, the development parameters. But at the same time, we expect investments to grow next year. And seriously, even against the investments declining the size of it doesn't mean that no more investments taking place in the country. The size of investments remains very high in excess of 42 trillion rubles. If you for example compare it to 2021, we had 21 trillion. Even if you deduct inflation, that is almost one quarter of growth, which means that we have attained a sufficiently high level of investments and this level ensures the development of production capacities. And by the way, we also see that the credit resource is I mean lending to corporates is growing overall in H1. It has grown but at the same time there is quite a sizable share of such credits are for longer term which if one wishes could be used for investment purposes.
