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

Colleagues, good afternoon. I am happy to welcome you. We are beginning the prep conference by the Governor of the Bank of Russia and the Deputy Governor Alex. To begin with, we'll hear a statement of the Bank of Russia Governor following the Board of Directors meeting. Good afternoon. Today we have made the decision to keep the key rate at 21% per annum. The tight monetary conditions that have formed in the economy are to ensure a slowdown of inflation in the next few quarters. Since the October meeting of the Board of Directors, monetary conditions have tightened even more than was implied by the key rate increase. This additional tightening is associated with, among other things, banks' response to the regulatory measures taken by the Bank of Russia. Consequently, lending growth notably slowed down in November. We will need some time to assess how steady this deceleration in lending is and how the economy is adjusting to the new conditions. Therefore, we're taking a pause in raising the key rate. We will assess the need for a further key rate increase at our upcoming meeting. I would like to stress that due to the considerable deviation of inflation from the target, monetary conditions should nonetheless remain tight for a long period in order to secure bringing inflation back to 4%. I would now dwell on the reasons behind our today's decision. This time I will explain them in the order our key rate decisions are transmitted to inflation. At first, the key rate translates into monetary conditions, then it influences economic activity, and ultimately it impacts inflation. Firstly, I will speak about how monetary conditions have changed since our previous meeting. When pricing a loan, banks rely on either the key rate level if it is a floating rate loan, or the expected key rate level if it is a fixed rate loan. Further, banks add a certain spread or an interest rate spread, as the economists are saying. At the October key rate meeting, the spread between the key rate and banks' interest rates averaged about 2 to 3 percentage points for the most reliable borrowers. Today it has expanded to 5 to 6 percentage points. In other words, interest rates have risen on average to the level that they could have been expected to reach, the spread being equal, with a key rate raised to 24% or even higher rather than to 21%. What are the reasons behind such significant changes in monetary conditions? This has been largely because of our regulatory measures. We announced in advance that were needed to enhance banks' financial resilience. I would like to remind you that in 2022, the Bank of Russia introduced a number of regulatory easing measures. They were required to ensure lending to the economy on a continuous basis and in adequate amounts despite the sanctions and the freezing of Russia's foreign assets. These measures have helped prop up economic activity during the acute phase of the crisis. However, such easing measures cannot be permanent; they are implemented for a short term to address crisis issues. In the second half of 2023, we announced the start of their phasing out. Nevertheless, as domestic demand was expanding, banks continued to actively increase lending. Yet the growth of the loan portfolio was not accompanied by a comparable rise in banks' capital and highly liquid assets. In order to avoid excessive accumulation of risks, we have been consistently raising the requirements for banks' capital and liquidity. This policy will continue to improve the financial sector's resilience and will not depend on the key rate level. We employ a number of different tools depending on the purposes. Some are aimed at ensuring financial stability, while others help achieve price stability. That said, when making our monetary policy decisions, we take into account decisions in the banking regulation. I would like to reiterate that the banking regulation measures are not intended to achieve monetary policy objectives; we have the key rate for this. Nevertheless, when making our key rate decisions, we do factor in the consequences of changes in the banking regulation, including their effect on lending activity. After the phase of the rapid increase in lending, banks are now moving on to a stage of using their capital and liquidity with greater prudence and reason. Further on, lending growth pace will depend on, among other factors, the banks' capabilities to build up capital. Accordingly, the expansion of lending may be expected to be slower next year, while banks are to shift towards more conservative approaches when assessing borrowers' risks. We can predict this judging by banks' moderate plans to increase their loan portfolios next year. The effects of the monetary tightening started to manifest themselves in November 2024. The growth of the overall loan portfolio considerably decelerated. Moreover, the expansion of the corporate loan portfolio slowed down for the first time over a long period. The retail loan portfolio has remained virtually unchanged for the two months now. According to high frequency data, credit activity remained moderate during the first weeks of December. Simultaneously, savings have continued to go up driven by high deposit rates. Our today's decision will support the current level of saving activity. Secondly, the economy. In October and November 2024, economic activity remained high, propped up by growing domestic demand including household consumption. This was largely the result of the accumulated effects of the fiscal stimulus, high credit activity over previous months, and increased household incomes. High frequency indicators suggest that the situation is gradually changing. Specifically, companies are setting more moderate targets for output, postponing or more carefully selecting investment projects, and reducing their borrowing plans for the next year. As reported by the Bank of Russia's regional branches, there are signs of cooling in construction, coal production, and metallurgy. Furthermore, there is a number of enterprises that have reduced the demand for labor. As a result, we observe a more active reallocation of workers from some industries to others that are still experiencing considerable staff shortages. This process is alleviating the pressure on the labor market. Thirdly, inflation. Inflation has accelerated in recent months, largely because of transitory factors. In particular, there has been a rise in the growth rate of prices for some food products, especially vegetables. This was associated with the bad weather that notably worsened the harvest for some crops. Another important contributor to the November statistics is the increase in the telecommunications and transportation tariffs. However, the high figures of October, November, and the first few weeks of December were generally the result of domestic demand that had been soaring during previous quarters. Factoring in the time lags, this overheating has been translating into current inflation, primarily its underlying components. Inflation expectations continue to exert additional pressure on prices. Households' and businesses' inflation expectations are largely backward-looking, that is, they are affected by the price dynamics observed in the past. Consequently, high inflation has a self-reinforcing effect through inflation expectations. In other words, high expectations contribute to elevated demand, entailing high inflation, which in turn further increases inflation expectations. In such a situation, even one-off factors might become persistent. In December 2024, the growth of households' and businesses' inflation expectations was also affected by the ruble weakening. When making our monetary policy decisions, we rely on the forecast of inflation and changes in its drivers. We are observing a notable slowdown in lending growth, which will have a significant disinflationary effect. Due to the accumulated inertia of inflation and the time lag of monetary policy transmission, this effect will be manifesting itself gradually. We expect that the inflationary pressures will start to weaken sustainably as the effects of tight monetary conditions increase. Briefly about external conditions. The main trends in the world economy have remained unchanged. Global economic growth has been gradually decelerating. Export dynamics in Q4 2024 have been slightly weaker compared to steadily high imports, coupled with another package of sanctions. This negatively affected the ruble exchange rate in November. The actual tightening of monetary conditions and the accumulated effects from our policy will ensure a more balanced growth rate of imports in the future. I would now dwell on the risks to the base forecast. Pro-inflationary risks are still our main focus. In the first place, high and moreover still rising inflation expectations might extend the period needed to bring inflation back to the target. The longer inflation deviates from the target and the longer it stays at high levels, the longer the period of high interest rates should be for economic agents to restore their confidence in price stability. Secondly, the risks related to the labor market are still a key constraint hampering economic activity normalization. Thirdly, the risks of trade wars and a more notable slowdown in the world economy have become slightly higher. This group of risks also includes a possible rise in geopolitical pressure. The key disinflationary factor is a more substantial deceleration of lending growth than assumed in our baseline scenario, which might be facilitated by, among other things, banks' willingness to pursue more conservative lending policy. This might be the result from both tougher capital requirements and an increase in banks' lending standards. A major point of uncertainty is how the economy will be adjusting to the new conditions. When making our future decisions, we will scrutinize the influence of these factors on the economic environment. Winding up, I would like to speak of our future decisions. Today, the key rate is rather high, and combined with the banking regulation and more conservative strategies preferred by the banks, it means considerably tightening monetary conditions. We will need some time to assess all the effects of the current level of monetary tightness. In February 2025, we will be choosing between two options. We will either make sure that monetary conditions are sufficiently tight, or return to discussing a key rate increase if the overheating of demand persists while lending starts to expand again. Our main objective is to achieve price stability within a reasonably short period, and we will take all necessary measures to do this. Thank you for your attention.

Dear colleagues, now over to your questions. Please introduce yourselves and identify your agencies. Marsha, please, in the second row.

We have gone over two options: nothing changed, raising up to 22%, and up to 23%. The debate was around the factors or data that one should pay more attention to right here and now, as they say. First of all, high inflation and high inflation expectations, but on the other hand, already strong deceleration of lending activity that is quite manifestly notable over November and the first half of December, additional tightness of monetary conditions because of limited capital supply brought about by the strengthening of the banking regulation, which I would rather say normalization, and the demand slowdown. So following our debate, the Board of Directors decided that in terms of the forward-looking policy, a more significant signal is the slowdown in lending now. If this is yet again confirmed by the February board meeting, then one may then recognize that the required tightness of monetary conditions has been achieved.

Nastya, in the second row, please.

Well, you know, the criticism of our policy is particularly strong during the high rate periods and the key rate being raised. I'm sure that you've observed it through so many years. So we are making our decision based upon our assessment of the situation and our forecast. In the situational assessment, I should admit we've been very actively collaborating both with the banks and the real sector of the economy in order to understand what exactly is going on in the economy now. From the point of view of communications, we will be looking into what else can be improved here, because indeed being able to properly communicate whatever we decide is very important. So we're always trying to explain the rationale that has driven us. But let me remind you that in our March board review, we identified four triggers towards changing the key rate to bring it up or take it down. We see that there is a very special focus upon the current inflation and the inflationary expectations, which is indeed an important indicator. But let me remind you that amongst other important indicators was the slowdown in lending, consumer lending, then easing in the labor market, because we don't see this being a sure thing, but we definitely ascertain that the demand for labor in many industries has reduced, because we polled various companies, but also know the lack of inflationary risks from the fiscal area. So we need to take into account a whole aggregation effect, because let me remind you that through the key rate we impact the aggregate demand and the lending activity. And specifically within the lending activity, some very notable changes have occurred that you can also see and actually we have published on November. But nevertheless, the November data point to the slowdown in the rate of lending, and this is something that needs to be taken into account. Alex, perhaps you can add.

Dear colleagues, please.

Yes, indeed, considering the available lags that we observe in different policy activities, now comes the time for all of the measures previously undertaken to really come together in terms of the fiscal policy and the inflation of 2023, as well as the effects from a planned easing in the banking regulation. I mean, apart from the easing in the banking regulation that we previously announced, we also introduced certain novelties in terms of the macroprudential measures, but we are notifying the banks in advance, giving them some period of time to get adjusted. So once again, I would like to draw attention to this: that the banking regulation measures do impact the monetary situation and the tightness, but they are intended for a different matter, to improve the resilience in the financial sector. The fiscal effects are going to be the strongest ones, and so our policy is aimed at avoiding extreme scenarios, because we should not allow the economy to continue overheating. This overheating needs to subside, but at the same time we need to avoid the overcooling as well. Therefore, we are very mindful of this, and we indeed have strengthened the intensity of data exchange not only with the government but also with the businesses and the banks in order to comprehend not only what has happened just by now but what is the way they're going to respond to this aggregation of different factors.

Colleagues, the next question online from Grigory Sakharov from the Ural city. Please go ahead.

I am convinced that the key rate is working effectively, because without it being raised, inflation would have been much higher. We estimated an alternative scenario: if we were to leave the key rate at the level we remembered since the autumn of 2022 until the middle of last year, which is 7.5%, then inflation not only would have been double-digit, it would have been much above 20%, maybe even 30%, because inflation expectations would have been growing very, very actively. And most importantly, inflation would have been accelerating. But the task of monetary policy is not to reduce inflation whatever the cost. Our task is much more complex: to slow down the growth in demand in such a way that this wouldn't be in the way for the economy to grow its production capacities and its potential. That is why we are moving gradually, consistently, not to create any damages, and every time we engage in a multifaceted assessment of it. Because we currently see that under the influence of the key rate and the banking regulation, lending has slowed down already in all segments. And if this kind of lending dynamics remain, gradually it will translate into demand and inflation. Certainly, we all would very much like the price growth to slow down quickly, but the economy is not in an ordinary situation. There are so many factors which make the ability to translate our key rate impact upon inflation harder. So the approach is the key rate and patience. Thank you very much.

Zhana, in the second row.

The mortgage scheming unfortunately stays. They are very diverse, they take all kinds of different shapes and manners. Regrettably, there is such an undue practice. But the mortgage standard is something that I would definitely like to mention because we lay our hopes upon it. The banks have agreed to this mortgage standard, as well as a supervisory standard with the help of which supervision is going to be pursued with the way the banks adhere to this mortgage standard. It will come into effect as of April, because I believe that will reduce the scale of such scheming. But we're not standing still with that, because we're not relying on our rulers; we're sooner going to introduce the kind of regulation that would put a greater burden upon the banks' capital as long as the schemes are being used whereby the consumers first are being allured by the low rates and then are being hit with the high rates. So if the rates grow over 20%, not in terms of the burden on capital but in terms of the elevated reserves, this is the first step that we're going to make. Second thing, we're going to discuss with the market the following approach: if the above-mentioned schemes do not disappear, so there's mortgage standard, there's going to be a normal kind of reserves placed under it, while in the rest of the schemes there will be higher impairment requirements. I understand that people are willing to support the demand for mortgages, but that must not be done by deceit. Insofar as the forecast for the mortgage market, in February it's 8 to 13, but you would need to additionally revisit it. As far as developers are concerned, we are watching out for the financial status of the biggest developers. I believe that I've already mentioned it previously, but the situation in every individual case is different, because there were such developers who were able to organically develop without increasing their debt burden, while others were developing aggressively, trying to really run after the growing demand, and they ended up being in a predicament. So I would say that we will see certain divestiture from various assets, a bit of a redistribution or reallocation in the developers' market. Thank you.

And call next, please. Sergey, in the second row.

Well, our position is that our currency market operations, apart from those that take place under the fiscal rule, are aimed at preventing the risks to financial stability and market dysfunction. Dysfunction is when, because of various devaluation expectations, practically no currency is being issued, no currency is entering it. But we're not conducting our currency transactions based on the exchange rates or high volatility. Why? Because we believe that the market must find its equilibrium. Because if we start intervening in such situations, even when the volatility is high, the market players will get this feeling that the exchange rate is artificial because it's supported by the central bank, because the central bank knows that then the exchange rate is going to depreciate, and that heats up the situation and prevents maintaining balance. And actually, we're going to see higher volatility of the exchange rate, yes, because of certain reasons, but it doesn't mean that we're not concerned by it. Because there is a bit of a segmentation in the currency market, we see it all. But at the same time, we are of the opinion that the exchange rate should remain a floating one. Then there will be a greater trust towards its market nature, because the central bank transactions should be limited to whenever there are risks to financial stability. Thank you.

Colleagues, Elena, in the row before the last.

I think the president answered it all yesterday. I have nothing to add to it.

Colleagues, please, Rita, you're right next to her.

Well, overall, we've got a more volatile exchange rate than we used to have before 2022. That's basically what we see. After each wave of sanctions, this volatility becomes higher. I mean, the scale of it growing higher depends upon the depth of sanctions, the sanction coverage. But during the summer time, when sanctions were against the Moscow Exchange, the key element in all our financial infrastructure, the high volatility persisted for a month. Well, then the market usually stabilizes at a certain level, first of all from the point of view of the fundamental factors of the current account and the trade balance. And also, after each sanction round, costs increase for international remittances and payments. So sanctions which took place in November also brought about a high volatility. We see that such volatility effects are dwindling. Most of the companies, like the case used to be during the previous sanctions, are able to adjust to the new environment. But similarly, we also witnessed an additional fragmentation in the currency market, higher transactional costs. But insofar as the exchange dynamics is concerned, it's not the best way to prevent the systemic depreciation of the exchange rate. Ensuring the market nature of the way it evolves and low inflation, because low inflation, all things being equal, makes the exchange rate more stable. Thank you.

Next question comes online from Samara. Sabrina Samova, Kommersant Volga. Sabrina, please go ahead.

No, no. The fact of the matter is that the key rate works in the following way: it takes inflation down. I mean, the decline, the actual decline of inflation, is the basis for the inflation expectations to drop. If basically you support a low key rate level, then inflationary expectations, the other way around, they will be growing, and that would mean that the central bank is not undertaking sufficient measures to reduce inflation and deflation expectations. But once again, let me repeat that our rate works with a bit of a lag in time. I used to describe it already. And so the high rate of 21% has been effective only since the end of October, while the whole of the transmission effect, you know, it transcends through almost 3 to 6 quarters whereby you can ascertain the full effect. So I definitely cannot agree that the high key rate brings about higher inflation expectations and higher inflation. On the contrary, the inflation expectations are impacted by the price dynamics, because households are really looking forward to see the prices starting to fall, but that cannot happen all by itself. You need to undertake certain monetary activities. And Alex, perhaps you can augment what I've been saying here.

Colleagues, please, Lyuba, in the second row, please.

Well, forecasts are regularly being updated, and this frequency has been announced: it is four times a year by the time of the core board meetings. And in February, we will do again, we will review and revise our forecast. This forecast can be updated, can you know materially changed or less materially, depending upon what's going on in the world, what is happening in Russia, and how that may impact inflation and the inflation forecast. So these reviews and revisions are not something wondrous. But revising the forecast this year was a strong one, I mean, if you compared to the start of the year and until towards the end of the year, so, so right, and that reflects the processes that are currently taking place in the economy. As far as the model is concerned, we haven't got just one model, we have several of them. All of them have been disclosed; you can read them and learn them.

You can criticize us, we invite experts to interact with us, which we do regularly. So the modeling as a tool is continuously being improved, and we shall continue doing so.

I would ask him to make sure that our economy comes to a balanced growth rate. It means positive growth rate, not just for 12 months but longer term, so that we can rest assured that the economy is growing consistently and constantly. Well, certainly, like all of the Russian people, I would ask for the price growth to slow down and for the well-being to improve itself. But apart from Father Frost, we also have certain tools in our hands to make sure that this is exactly what is going to happen. Thank you very much.

Certainly we do not think that way. But you're quite right: after a lengthy period of high price growth, people find it difficult to believe in future price stability. This is correct, we understand it. So this kind of trust can be regained only in one way: to bring down the price growth, to slow down inflation, to bridle it and keep it around 4%, which is our target, for a continuous period of time. And there is nothing impossible, because I can remind you that we've gone through a period like that in 2017 to 2020, when many thought that was a fantasy, that it was not feasible. But we do believe that it is possible. We see and we know how people are worried by growing prices, and the tools that we have enable us to achieve this outcome. So here we work in close coordination with the government, which possesses its own toolkit enabling it to more actively affect the supply growth in the goods and services market. Thank you.