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

Good afternoon. Today we have made the decision to keep the key rate at 21% per annum. Current price growth rates are going down gradually, which is largely the result of the Bank of Russia's restrictive monetary policy. The slowdown in inflation has also been promoted by improved sentiment in the markets and a stronger ruble. Nevertheless, price pressures remain high and inflation expectations are still elevated. Hence, we need to maintain tight monetary conditions for a long period. Our further decisions will depend on how fast and sustainably inflation is decelerating and whether this is sufficient to bring it back to 4% in 2026. If not, we may additionally raise the key rate, although the probability of such a move has softened. I would now dwell on the reasons behind our today's decision. Firstly, inflation stays high. To a great extent, the high rate is explained by a persistent demand-side pressures, which is most obvious from the underlying measures of inflation. Although core inflation is decelerating, it stays close to 10%. At the same time, current price growth has been gradually slowing down since the beginning of the year. While price growth remains high in services, in the food segment nonfood inflation has decelerated to moderate rates. In the first place, this slowdown has become evident in the segment of durables, namely cars, household appliances, and furniture. Prices in these categories are most responsive to monetary policy and the exchange rate. A reduction in sales in these segments, which is confirmed by recent monitoring of businesses, also proves the effects of monetary policy. Companies report a rise in stocks of electronic devices and cars. In words, retail expected higher demand than is currently observed. Alongside our monetary policy, price dynamics have also been affected by a stronger ruble. Further developments in the foreign exchange market will depend on actual changes in the external environment. It would be premature to draw any conclusions about how strongly this factor might influence future inflation dynamics. Households' inflation expectations have continued to trend downwards in March, decreasing to 12.9%, which is the lowest level since last September. The decline in companies' price expectations has accelerated. However, inflation expectations are still elevated, which is preventing inflation from decelerating faster. Secondly, the economy at the beginning of the year, economic activity slowed down slightly compared to the end of 2024. This is in line with our February forecast. Nevertheless, consumer activity remained high in January, additionally driven by a faster increase in wages at the end of 2024. This acceleration was associated with earlier bonus payments that some companies made in December 2024 instead of Q1 2025 due to tax changes. This is why it will only be possible to assess wage dynamics more accurately after we receive the statistics for Q2 2025. Preliminary data on consumption in February and March are mixed. There are the first signs of a moderation in investment demand. In particular, we have been recording a reduction in sales of freight vehicles and the demand for construction materials. Increasingly more companies are postponing their investment projects; nevertheless, they do not suspend the projects launched earlier, which is possible due to the profit accumulated over previous years, among other things. At the end of 2024, companies' profits declined; however, compared to historical levels, the amount of profit is rather high both in the economy as a whole and in most industries. Now this profit may be a source of financing for current investment projects. The labor market remains tight, although there are now more signs of decreasing labor shortages. This is confirmed by recent monitoring of businesses. In addition, the number of CVs submitted per one vacancy has been growing. The signs of a moderate slowdown in domestic demand growth and a gradual easing in the labor market indicate that the economy is rather on a soft landing path without sharp fluctuations. Thirdly, monetary conditions: price monetary conditions have eased slightly, whereas nonprice conditions have remained tight. Yield curves in the money market and the government bond market have shifted downwards, affected by market participants' expectations of a possible improvement in the geopolitical situation. Furthermore, nominal interest rates in many segments have notably decreased. However, considering the simultaneous decline in inflation expectations, monetary conditions in real terms have changed not that significantly. Lending amounts have changed more substantially in both the retail and corporate segments. The slowdown has been most pronounced in consumer lending, primarily in unsecured lending. Corporate lending has been expanded at a moderate pace, but its dynamics have been blurred due to elevated budget expenditures in the beginning of the year. Many companies use the funds received from the budget to repay the loans raised earlier. Overall, lending growth rates are close to the lower bound of our baseline forecast. In recent months, lending growth rates have been notably below last year's peaks. However, this cannot be interpreted as a continuing tightening of monetary conditions, because demand is affected not only by lending but also by budget payments. I would like to remind you that the resulting indicator characterizing the combined effect of credit and budget funds is money supply. In February, its expansion slowed down, albeit not as appreciably as in lending, which was because budget expenditures remained high. I would briefly talk about the budget. Budget expenditures were elevated in January and February, as was explained by the Ministry of Finance. That was associated with earlier financing of expenses and advance payments under government contracts at the beginning of the year. The Ministry of Finance is nonetheless determined to decrease the structural primary deficit to zero by the end of 2025, which implies a gradual normalization of budget spending to the seasonal norm in the coming months. We take it into account and assume that the budget will have a disinflationary effect this year. Now I would like to speak of external conditions. Export dynamics have been rather stable in recent months, whereas the expansion of imports has been decelerating due to restrictive monetary policy. As a result, the surplus of the balance of trade has increased, which among other things has strengthened the ruble. Overall, ruble assets have become more attractive owing to sustainably high yields in rubles and a more positive estimate of geopolitical risks by market players. Nevertheless, it would be premature to predict how stable the changes in external conditions will be. As regards risks to the baseline scenario, the balance of risks has generally remained unchanged, with pro-inflationary risks predominating. In the first place, these are risks associated with the labor market and inflation expectations. As to disinflationary factors, this is the risk of a more considerable slowdown in lending. The principal area of uncertainty is the external environment, as its further changes might have both directions. Among risks are growing protectionism; a disinflationary effect is possible if geopolitical tension eases and sentiment in financial markets improves sustainably. Winding up, I would like to comment on our future decisions. Further developments are highly uncertain, including external conditions as the reason. We can see that market participants' expectations and sentiment are affected by the revision of their assumptions about a possible improvement of geopolitical conditions. Nevertheless, we build our monetary policy on sustained trends, fundamental factors, solid facts, and a conservative approach to risk assessment. It is crucial to stick to this approach to confidently bring inflation back to 4% in 2026, regardless of further external developments. According to our estimates, current inflation trends require a long period of maintaining tight monetary conditions. If we need to raise the key rate to be able to return inflation to the target, we will be ready to do this, although the probability of such a move has decreased. Thank you for attention.

We did not discuss lowering the rate today. And to expect the start of it going down is when we will be sure, and it will be manifested that the inflation is going down sustainably and at the speed which will enable us to bring inflation down back to 4% in 2026.

It all depends on how the situation evolves. Because we truly see the current inflation pressure subsiding, but it is happening due to some sustainable factors as well as some one-off factors. So we need to make sure that inflation is sustainable in its decline. Now, if the pro-inflationary risks that we see manifest, then the rate may need to be raised further. We find ourselves in a situation of sufficient uncertainty. Our current vision is that the tightness in monetary terms is sufficient. But if there is need, we would be ready to raise the rate. And our forecast of the average rate for this year reflects both options. If the situation evolves in a certain way, the rate can be brought down, but it can be raised as well. Our range is 19 to 22%.

No, we don't have such plans. And we believe that it would be better not to meddle with the mechanisms the banks follow to set this exchange rate, because it may end up them not really finding it attractive and they won't be able to meet the demand. But I would like to comment that the exchange rates in the street exchanges have always been different from the interbank exchange rates on the basis of which the official rate is set. And after cash wholesale supplies into countries stopped in 2022, these exchange rate differences indeed grew. One other point that one should pay attention to: these spreads usually grow during periods of high volatility. Once this volatility goes down, these spreads also contract. So the narrowing of the spread is promoting competition between the banks. So that's the kind of situation we see. But in terms of any special measures that we should undertake to interfere into pricing and regulate pricing, it's something that we don't intend to do.

When deposit rates are above the key rate overall, this is very much not a standard setup. I would say that we have rather gone back to a normal correlation between the deposit rates and the key rate. Now, the deposit rates higher than the key rate in November and December were because the banks expected further tightening of the monetary environment by the Central Bank, further raising of the key rate. Another factor hanging over it was the toughening of our macroprudential policies. But after market players' expectations changed with regard to the key rate, we noticed that this spread narrowed. And again, this narrowing occurred because we had corrected the schedule for the liquidity standards for the banks. So we believe that the situation is basically normal, as they say.

The Central Bank is making up its mind about the key rate independently, on its own. But both the Central Bank and the government work to ensure that the economy is developing sustainably, that the well-being of the people is growing. And certainly, we maintain continuous contact with the government, exchanging information and forecasts. But we have our own tasks and our own toolkit, and so we make decisions independently, as I said. Now, to implement national development goals, the government has its toolkit, like regulatory measures, reducing administrative barriers, structural barriers. Another powerful tool is the fiscal system, the budget. Because via the budget stimulus, the government is capable of supporting important industries and companies, and decides about how to improve productivity. So you definitely see that the application of it has become more active now. The monetary policy that the Central Bank pursues is aimed at the demand side, because our task is to regulate demand in such a way that it conforms to how the economy's industrial output capacity is growing. So as not to let it transform into active price hiking. We see that it is slightly separated from it, so we need to work in such a way that supply catches up, so that both sides of the economy work at a pace to avoid inflation growing. Now, speaking about coordination with the government, I should say that for this year we have planned to reduce the budget deficit and a more reserved approach to subsidized programs, because we feel that it will help to hold back demand as well as inflation.

Well, of course the exchange rate does impact inflation expectations. This is an important factor that does it. But inflation expectations do not automatically follow the exchange rate. There are other factors. People pay attention to price tags in shops. There are certain product markers, as we used to say, that people are cognizant of when developing their own perception of what kind of price growth they should expect. We do see that exchange rate volatility, regrettably, currently because of sanction restrictions, is stronger than it was in 2022. And if we talk not about exchange rate dynamics but about volatility, this is not the kind of factor which would be conducive to inflation expectations going down. But what I would like to underscore: the lower is inflation, the more stable is the exchange rate. Therefore, when we achieve a stable low inflation, that will work for the good of stabilizing the exchange rate.

Thank you for your question. I would say that there are several aspects to this. In fact, if you look short term, this shift in budget spending and such a fast allocation of funds may make an additional positive contribution to inflation. But if we talk about a medium-term inflation trajectory, what is more important to us is not how spending is distributed within a calendar year, but whether the budget is going to be performed, whether the budget deficit is going to stay at the level that had been planned. I mean, the overall structural budget deficit. Because in our forecast and making our estimate of the inflation forecast, we come from an understanding that this year the budget will generate a disinflationary effect, because the structural deficit remains. So to discuss with the government to give up on advance financing is something that is not worth doing. Moreover, it is necessary to support the development of certain industries and companies. You also need to bear in mind that demand in the economy starts shaping up not when specific money is being made available, but when government contracts are entered into and companies receive the right to start spending that money, understanding that the budget will pay them. Once they start executing the government contracts, then this demand amasses. So we do take into account these short-term effects, but as I said, it is very important for us to see that the Ministry of Finance adheres to its core targets, to bring the budget deficit down to zero towards the end of this year.

Well, as far as specific transactions and money involved, we are not commenting on it, because the decision about it is being made by the president based on an economic rationale. But as far as the non-resident interest towards Russian assets is concerned, we do not have the authentic data that we can rely upon which could point towards this interest being material. Although as a subject, it is being discussed quite broadly. I mean, there is a reason behind it: you know, rate differential, different indicators in terms of the viability of investing into such assets abroad and in Russia. But certain sanctions and other jurisdictions imposed upon capital flows are still there. But we will definitely monitor this as information emerges. Thank you.

Well, jokes are good things, and I'm quite okay about it, particularly when jokes really make one laugh. That's absolutely okay.

With regard to stability of the trends in lending that we observe, the basic slowdown is in the retail segment, and it has been taking place since November last year, if I'm not mistaken. So the trend there is quite stable. As far as corporate lending is concerned, which I've mentioned already, we see that the pace and rates have become much more moderate compared to the very high ones last year, but the data is very much blurred, very noisy because of this advance payment from the budget system. So in terms of sustainable trends in corporate lending, we will be able to confidently say something about it only once we have the second quarter data in our hands. Now, as far as capital adequacy and macroprudential measures are concerned, yes, we do apply macroprudential regulation. Indeed, in order not to accumulate risks in the banks, we try to disincentivize such lending and ensure additional capital buffers are created. But in terms of any systemic reduction of such markups, this is not what we plan, even if the lending pace is more moderate. But as far as the anticyclical markup is concerned, we are going to monitor the situation. But in terms of our plans to change our plans now, we don't have them yet, particularly since we believe that an anticyclical markup in quiet times, even when there's no overheating, should be positive in serving as a buffer for banking capital to grow uncontrollably.

At this point in time, we do not see such risk. If there is an interest like that, it hasn't yet expressed itself in any large scales. I mean, although I can't say that we have full data. So, principally speaking, we do not see any risks to financial stability in the growing demand for government bonds, because we acknowledge that this demand, both in the primary market and in secondary exchange trading, involves a broad set of players: banks, institutional, private investors. And this interest has been conditioned not only by expectations in the area of geopolitics but also by the first manifestations, first indicators surfacing about the slowdown of inflation expectations. So a certain adjustment may well occur, but we do not see any big risks here. Thank you.

Well, as to the first question about the gap provisions: we on multiple occasions mentioned that it is very difficult to measure it, so we don't come up with any estimates. The indicator of the gap is inflation dynamics. So effectively, inflation is above our target, and that is an indicator proving that the gap remains. But simply because current inflation expectations are lowering, that may testify to the fact that gradually the gap is narrowing. Now, as far as extraordinary board meetings are concerned, I mean, that's exactly why they are called extraordinary, because nobody expects them to take place. So there's nothing else to add to it. But in terms of there being any prerequisites for yet another meeting or an extraordinary meeting, no, we don't see it.