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

Dear colleagues and friends, good evening. We are about to begin our traditional press briefing dedicated to the another decision on the key rate. This press conference is being attended by the governor of the Bank of Russia and the deputy governor Alex Zabotkin. And to begin with, we will hear the statement of the governor following the board of directors meeting. Good evening. Today we have made the decision to cut the key rate to 16% per annum. Inflation has been slowing down. In November, this deceleration was even slightly faster than we expected, which was associated not only with persistent but also to a great extent one-off factors. That said, in the coming months, prices will be considerably affected by the VAT rise and the increase in administered prices. The resulting impact is yet to be estimated. We take all of the above into account when determining the pace and scale of the key rate reduction. I would now dwell on the reasons behind our today's decision. Firstly, inflation. Current price growth rates have been volatile in recent months. They were up in October but dropped in November. Goods with highly volatile prices namely fruit and vegetables as well as petrol have largely contributed to these dynamics. Petrol prices have stabilized following their rapid growth and have even edged down owing to the measures taken by the government. According to weekly data, annual inflation has already decreased below 6%. The full year price growth in 2025 will be at the lowest level over the past 5 years. Current growth rates of underlying inflation measures were also down to around 4% in annualized terms in November. However, it would be premature to draw conclusions about whether this deceleration is transitory or long-term based on one month's data. On average, over November, current growth rates of most underlying inflation measures remained slightly above 4%. In addition, inflation will temporarily accelerate in early 2026 due to the VAT increase. In December, certain companies have already started to adjust their prices considering this factor, although its main effect is yet to materialize. By contrast, some companies are seeking to sell out their stocks faster at the end of the year ahead of the VAT rise, offering customers attractive prices, which might have a temporary disinflationary effect. In January, prices will also be impacted by additional indexation of housing and utility tariffs and other administered services and prices. Given the updated indexation parameters, the influence of one-off factors on inflation might be more significant next year than we estimated in October. The VAT increase affects a wide range of goods and services and therefore may influence inflation expectations. In November, December, they were up both among households and more notably among businesses. The rise in inflation expectations is a tangible factor as they influence not only decisions on purchases but also the attractiveness of interest rates. After all, when deciding to deposit money, take out a loan or invest in a new project, people and companies explicitly or implicitly weigh the expected return against the expected price growth. This means that we have to consider this factor when making decisions on the key rate in order to maintain monetary policy as tight as necessary to bring inflation to the target. Secondly, the economy. The economy continues to return to a balanced growth path which is evidenced by the decline in inflation. According to our estimates, it will cool from its always heated state in H1 2026. High frequency data show that economic growth slightly sped up in Q4 2025 as compared to the previous quarter including in mining and quarrying and in manufacturing. Consumer activity growth remains strong having accelerated following its smooth slowdown in H1 2025. This trend is particularly pronounced in public catering and a number of other services as well as in the non-food segment. In recent months, consumption growth has been additionally fueled by the expansion in demand for cars in anticipation of the rise in the recycling fee. The October December business surveys show that companies are more optimistic about future demand for their products as compared to the previous quarter. This is associated with the easing of monetary conditions that happened earlier. However, the dynamics remain highly uneven across industries. Investment activity growth has been mostly decelerating while also demonstrating mixed trends across sectors. Over the past year, there has been a slight decline, for example, in construction where investment levels were record high in the previous years as well as in transport and certain mining and quarrying sectors. Nevertheless, the investment volume in the economy as a whole remains close to the three-year highs. In January September 2025, fixed capital investments totaled over 26 trillion rubles. In real terms, this amount is at a par with the one recorded over the same period last year. As for the labor market, its tightness has been decreasing, albeit slowly. Surveys show that the percentage of enterprises experiencing labor shortages has been gradually declining. It is already notably below its peak levels observed last year. Companies are planning to raise wages more moderately in 2026. Certain industries have been registering growth in part-time employment, although it remains low in the economy as a whole. Thirdly, monetary conditions. They remain tight but have slightly eased overall compared to October. Amid decreasing loan rates, corporate lending continued growing rather quickly in October and November. Moreover, this growth is observed across a wide range of industries and companies. Mortgage and car lending also continue to expand, albeit less notably than corporate lending. The acceleration in credit growth is a natural response to monetary policy easing. It is important that the Bank of Russia maintains monetary conditions as tight as necessary to ensure balanced growth of lending compatible with sustainably low inflation. As we have already noted, deposit rates have stopped declining. They have even edged up for some maturities as compared with early October, maintaining the attractiveness of ruble deposits. Concurrently, households are becoming increasingly more interested in other forms of savings, including investments in securities. Saving activities stays at a historically high level overall. Briefly about external conditions. Prices for key Russian exports are running lower than forecast by the Bank of Russia. This is attributable to both deteriorating conditions in the global markets of certain commodities and the impact of sanctions. Despite worsening external conditions, the ruble remains strong. The first factor is the effect of the fiscal rule. The second one is the influence of a tight monetary policy which supports modest imports growth, thus reducing demand for foreign currency. Owing to high interest rates, ruble assets remain more attractive than foreign ones. Furthermore, demand for foreign currency is contracting due to the measures ensuring import substitution and supporting domestic producers. These are structural factors whose impact materializes over a longer term horizon. In the short run, the ruble exchange rate is affected by expectations regarding geopolitical developments. The ruble appreciation that happened this year continues to produce a disinflationary effect, although it has already become weaker. I will now speak on risks. Pro-inflationary risks prevail over the next year's horizons. Risks stemming from tight labor market characterized by labor shortages remain high. Another significant risk is the increase in inflation expectations caused by the VAT rise in tariff indexation. Furthermore, there are risks related to external conditions in particular oil prices. Finally, credit dynamics may also carry risks. If the expansion in lending and accordingly in money supply is excessive, this might hinder the economy's return to a balanced growth path and exert pressure on prices. Geopolitics is also a considerable source of uncertainty. That said, we take into account disinflationary risks as well, particularly the risk of a substantial slowdown in domestic demand growth. And finally, regarding our future decisions, the scale and pace of further monetary policy easing will depend on the sustainability of the inflation slowdown and the dynamics of inflation expectations. Should pro-inflationary risks emerge, we might need to make pauses between the key rate changes. This means that the key rate will not be lowered on autopilot. We will regularly monitor all key indicators of the Russian economy and external environment and adjust the key rate path accordingly if necessary. In the coming months, we will pay close attention to how prices as well as households and businesses expectations respond to the VAT increase and tariff indexation and how the situation unfolds in terms of other pro-inflationary and disinflationary risks. That is whether they become stronger or weaker. Sustainably low inflation that we are striving to achieve is the only way to ensure moderate interest rates for all and a predictable environment for making long-term investments and plans. This paves the way for stable economic development and people's welfare growth and that is what we expect to see next year. So wishing you a happy new year. Thank you for your attention. Now colleagues, for video questions please introduce yourselves and identify your agency. Marcia in the first row please.

We reviewed three options: the one to keep the rate unchanged, then lowering it down by half a percent, and just by one percentage point. So those who proposed to keep the key rate as it was paid greater attention to the fact that in the meantime it is premature to consider whether the inflation is slowing down because it has been volatile over the past few months. I already mentioned October and November and just judging by one month it would be quite difficult to decide on how stable it might remain considering the pro-inflationary factors that are to emerge soon like indexation and tariffs. Also attention was paid to a significant speeding up of credit activity and the increased inflation expectations remaining. So those who suggested that we do more expressed an opinion that the kind of inflation slowdown that has been going on is already quite sustainable. But under such circumstances, the majority believed that one should decide on a more balanced and cautious approach to reduce the key rate by half a percent. Colleagues please. Sergey in the second row.

Thank you. Well, I can definitely state that we've gone through a significant part of this journey, but the second run is much harder. Any marathon runner knows about it. You may recall how we compared the way we were moving with regard to the rate, not only the rate but also with regard to the whole economy, with a short-term journey. Low inflation within 1 month is not enough definitely and that is why we are paying stronger attention, and you definitely saw it through our publications and communication, not only one month's inflation but the 3 months long inflation, the fluctuating one adjusted from the seasonality over the past months was 2.5% which is above our target. Add on to this inflation expectations and you will understand why we're being so prudent and cautious about reducing the key rate. The inflation expectations remain quite high. So we account for all of it and you know a forecast about the key rate, we see that the neutral rate is the one that we're going to move towards in 2027.

Well, first of all, we already note that the market mortgage activity is growing. Of course, the prevailing part in mortgage contracts is the subsidized one, the family one. But at the same time, we see that the market mortgage activity responded to the reduction of the key rate. And further on as the inflation goes down, as the key rate is brought down, the mortgage activity will definitely grow. Now what will be the level of rates? I suppose it would be quite pronounced once the key rate is near the neutral range. Thank you. The next question comes from Krasnodar from Yurchum Permakov. RBK South and Northern Caucasus from Krasnodar. Yes.

We accounted for the fact that the VAT increase may considerably impact prices over the next few months. And one should say that it has already been reflected upon the inflation expectations. But it is yet for us to understand what the outcome of it will be in terms of the fact by deciding on the speed of the key rate reduction because we believe that our tight monetary policy enables one to reduce this transfer effect of high ability into the prices including the secondary effects and it all deters inflation. With your permission, I would like to further elaborate: the VAT facts have been taken into account in our forecast and in our decisions back during the October board meeting because the October board meeting decision was already based with the view over the VAT rise. And the second consideration I would like to underscore: within the midterm perspective, looking at the next full year, the VAT rise would be disinflationary compared to whether it shouldn't have been done with the fiscal system encountering much higher deficit.

We haven't received any official documentation describing such possible swaps or exchanges. So it's premature to talk about anything taking place on our side.

Well, indeed, we're quite cautious about making any decision about the rates, bearing in mind the strong pro-inflation risks based on our baseline scenario. As you have seen, we intend to reduce the key rate, but considering the factors related to the high pro-inflationary expectations and others that we have so far enumerated, it will definitely act in a very cautious way. Now with regard to the inflation dynamics throughout the next year period, yes, quite possibly a certain growth, I mean the current price growth rate may speed up in January because of the VAT rise, but we think that the stable inflation after that speed up will continue to go down in the second half of the year. The stable inflation components will show the 4% level. There possibly could be a slight price growth increase in the end of December once the indexation will start coming in but it will also be temporary. Oh yes, the second question was about the banking acquiring services. We expect that very shortly the Minister of Finance is going to come out with this explanation about the list of transactions that will be subject to VAT and only after that one can come up with better estimates. But overall, it is quite evident that avoiding tax exemptions might impact the payment market. Of course, there is a risk that the banks would move their additional cost into their tariffs, but this movement must take into account within the context of general tax changes. And if, like Mrs. Button already noted, if the choice between higher taxes and higher fiscal deficit, you need to make up your mind. The first one is less pro-inflationary than the second one. Now the way inflation is going to be translated into higher prices throughout the rest of the economy, the economic entities will be deciding on their own but at the same time taking into account the demand as well as the competitive environment which is out there because in the payment market there is also a competition. So I believe that the banks will definitely consider this.

Well, we believe there is no failing in our attempts to do so simply because over the past few years pro-inflationary risks materialized. Inflation has been accelerating and I remind you that in the end of 2024, a whole year ago, if you consider the monthly price growth rates and you annualize them, they were about 14%. Which means that we entered the year with a very high inflation and we didn't set ourselves a task this year to secure ourselves at the target because that wouldn't have been any sort of landing and it would have produced the risk that next year would have deviated very much lower from the target. And that is why our estimate in the beginning of the year, if you may recall, for inflation towards this year 7 to 8% inflation has been slowing down faster under the influence of the tight monetary policy that we're seeing. So that is why we believe that our policy is working and as we've planned we are now doing the balanced credit activity and overall balanced economic growth. Thank you. The next question comes from Yekaterinburg from Anton Gloohov, Ura.ru, please Anton.

Our top priority is price stability and it does not contradict the objectives to develop credit activity and the investments for the sake of economic growth. It serves all the necessary conditions both for stable and sustainable economic growth. But I would like to say that stable low inflation is not some kind of ministerial task. It's a foundation for normal economic development including the long-term lending, long-term investments into developing the manufacturing in this country. And that is why it is much more important to try and draw the line underneath this long period of high inflation. Actually the credit activity growth hasn't stopped. If you look back over the past 3 years since 2023 including the current year, credit activity grew very substantially. The recent data of the end of December tells us that the credit portfolio generally in the economic language, that is the economic requirements, it has reached 155 trillion rubles and that corresponds to the credit portfolio having grown 55% since the end of 2022. A very considerable growth also was in real terms. If you net it from the inflation impact, 35% over the past 3 years, the credit activity has grown. But what's important is that it contains not only short-term lending, above 45% in this growth, or the credits for more than three year maturity and such loans are usually being secured for investment purposes. So such a considerable credit growth in many ways also produced a significant investment growth and like I mentioned in my introductory remarks with regard to investments, one should take a closer look at the statistics and the figures. Over the first three quarters, investment into the fixed capital amounted to 26 trillion rubles, that is additional 10% on top of last year. Now if you are adjusted by the price growth, it's positive 0.5% which doesn't seem to be too much but what I would like to highlight is the existing level of investments, the amount of investments being done has already reached a record level and it will all support the production opportunities. You know, my colleagues describing a certain case which enables one to take a look at this investment growth rate as well as the achieved investment level similar to an automobile: in order to drive faster, it's enough really to put your foot on the pedal and just let it roll on without always increasing it. And so following this analogy, it's not the investment growth that counts but the level achieved, its productivity, the extent to which it leads to the labor output and that defines the growth of the gross domestic product in many ways. Thank you. Elena in the row before the last one.

Well, we're not planning to recall our claims, but your question was about how the court ruling is going to be enacted and how any damage is going to be covered. It will be decided once there is any definite decision handed down. But we also considered to protect our interest in the international arbitration courts with the subsequent enforcement of such sentences in other jurisdictions.

As far as the raising VAT on the banking transaction is concerned, I already look at it as something already given. The decision has already been made that may bring about certain increase in the tariffs applied but once again, one should take this decision as part of a comprehensive tax change initiative which were decided upon because of higher expenditures. The alternative was to increase deficit and the sovereign debt. If you compare these two options, in line with our mandate, certainly raising the VAT is more disinflationary than the alternative to it. Now, with regard to the payments moving into the cash area because of the VAT raise, I don't see any such risks at all because people have already grown used to paying non-cash. It's very convenient, very fast and they definitely prefer non-cash transactions and in our statistics we don't see yet and I'm sure that we won't see that people will switch to using cash. Now as far as a record growth in the corporate sector is concerned, indeed there is a bit of an acceleration in credit activity. Partially it can be seasonal because we have that particularly since the number of those who receive the fiscal funding is growing in an expectation that soon they're going to get the government money, but that could also be explained definitely due to the easing of the monetary conditions. It's not a record high. It has sped up indeed since the beginning of the year past H1, but the corporate lending growth is slower than what it used to be in 2023-2024. Now with regard to the impact upon inflation, what we see as important is the overall growth rate in lending and its growth turned out to be lower than what we expected in the beginning of the year and we are looking not as much at the credit growth but the money aggregates. It is important how much resources are flowing through the government channel. It is always important but such share corporate lending growth is something that you definitely need not to take your eyes off. And to what extent the money aggregates are going to go up considering the fact that within the corporate lending we've got quite a big share on non-sensitive or less sensitive borrowers, I mean sensitive to the interest rates. Thank you, Marina, please.

Well, it's either my wish came true or our policy really was effective but indeed we have come to see that the inflation has considerably slowed down. The economy is shifting towards the balanced growth path and for next years I would very much ask us not only to touch the 4% level but to achieve the price stability in a sustainable way and I would very much like our people in this country and our businesses to feel the advantages of the low inflation. Thank you. The next question from Victoria Sherina, Law and Finance.

Thank you. Well, the questions of financial stability are always a priority for us. They always bear significance. But we currently don't see any risks to financial stability. Although, you know, on a quarterly basis, we come out with special reports covering financial stability risk. We judge vulnerabilities where they can appear. It is very important for us to prevent such risks from materializing. We look at the advanced indicators and so on and so forth. So I can just answer your question in such a way that we don't see such risk right now, and it didn't affect our decision about the key rate. Now, with regard to the banking system stability, yes, it remains quite stable. We do see that there is a certain growth in problematic credits, but in terms of corporate lending in such a category, it's not much, just about 4%, which is really not much. The banking system is well capitalized once again, and we don't see there being any issues about it.