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

Colleagues, good afternoon. I'm very glad to see you at our press conference by the chairman of Bank of Russia, leader Navan and the deputy chairman, Alexi Zabotkin. And to begin with, we'll hear the statement following the board of the director's meeting. Good afternoon. Today we have made the decision to cut the key rate to 14 and a half percent.

Economic activity is slowing down. Demand dynamics roughly correspond already to the economy's capacity to ramp up supply. However, inflation still exceeds the target so far. Measures of underlying price growth remain in the range of four to 5%. Moreover, pro-inflationary risks have risen considerably. They are attributable to the Middle East conflict and possible changes in fiscal policy. In these conditions, we need to follow a more cautious and prudent approach to making our decisions. Taking this into account, we have slightly raised the forecast of the average key rate to 14 to 14% for this year and 8 to 10% for the next year. I will now explain the reasons behind our today's decision. Firstly, inflation. In March, current price growth did not decelerate, staying at about 6%, which was associated with one-off factors. Specifically, the Middle East conflict led to the redirection of tourist flows, which induced a rise in service prices. Another factor was growth in retail prices for petrol. Although transitory factors significantly contribute to price dynamics, we scrutinize fundamental reasons in the first place when analyzing inflation. The key aspect is the balance between the economy's production capacities and demand dynamics. Although the gap between the said indicators has almost closed, underlying inflation still exceeds 4% as a result of the demand overheating that was observed over previous periods. It continues to translate into inflation expectations which remain elevated. Additionally, increased budget expenditures in early 2026 also exerted outward pressure. Nevertheless, we forecast that the accumulated tightness of monetary policy will return underlying inflation to 4% as early as H226. We have kept the inflation forecast for this year unchanged at 4 1/2 to 5 1/2%.

Secondly, the economy economic activity decelerated in Q126, which was partly explained by the economy's adaptation to the tax changes. Another contributor was calendar effects. The first two months of the year had three fewer business days than January February 25, which accounted for up to a half a percentage point decrease in year-on-year GDP growth rates in Q126. According to our estimates, in Q2 2026, this factor will have the opposite effect. May June will have three more business days than a year earlier. All this means that we will only be able to assess output dynamics more accurately based on statistics for the first six months of 2026 as a whole. Investment activity has generally declined while remaining highly heterogeneous across industries and regions. Thus, mining and quaring enterprises had moderate investment plans in early 2026 due to last year's weak financial results. Companies may revise their investment plans upwards this year due to higher prices in global markets. Construction is also expected to rebound to a certain extent. The abnormal frost and snowfalls at the beginning of this year led to the forced downtime in Q126 and therefore construction companies will make efforts to catch up in the next quarter. According to our forecast, total investment in 2026 will be comparable with last year's amount. Consumer demand growth also slowed at the beginning of the year. March saw signs of its revival with car sales expanding notably. However, the rise in consumption is generally more moderate than in the previous year. The labor market is recording more obvious changes. Businesses have started to reduce their recruitment and payroll increase plans more actively. The percentage of businesses reporting acute staff shortages has been declining. Some companies have begun to lay off employees. That said, the unemployment rate stays at its record lows. This means that in the vast majority of cases, people manage to find new jobs, especially in large cities where companies still demonstrate rather high demand for labor. Overall, the labor market tightness has been decreasing gradually and its pressure on businesses course will be weakening.

The economy's moderate dynamics in Q126 will be offset in the next periods according to our estimates. In addition to calendar effects, this will be driven by a partial rebound in consumer and investment activity which is already obvious from high frequency data for March and April. Higher prices in global commodity markets should become an additional factor that will support domestic demand. Considering this, we have kept our GDP growth forecast for this year unchanged at the range of .5 to 1.5%.

Thirdly, monetary conditions, they have slightly eased overall since March while remaining restrictive. Interest rates on main financial market instruments have continued to go down, adjusting to the key rate reduction. Credit activity remains moderate from the beginning of the year. Consumer lending demonstrates signs of a rebound. While growth in the corporate segment is still modest in Q126, part of company's financing needs were met not by loans but by record high advanced payments from the federal budget. As a result, the growth rate of money supply, which combines the effects of the fiscal and credit channels, is running closer to the upper bound of the 201619 range when inflation was sustainably low. If the fiscal policy's contribution to money supply remains more significant, the dynamics of bank lending should be more moderate for the growth rate of money supply in the economy to stay at the current level. Interest rates on time deposits have also been declining following the key rate. In these conditions, households have started using other financial instruments and demand deposits accounts more actively. Household saving activity remains high overall. Now I would like to speak of external conditions. The situation in the Middle East remains a factor of uncertainty. According to our baseline scenario, the conflict will entail a slowdown in the world economy, a global rise in logistics and energy costs, faster inflation in higher interest rates worldwide. We have revised upwards the forecast of the Russian oil prices to $65 per barrel for this year as well as the forecast value of exports. The value of imports will also increase due to higher global prices, albeit less notably than exports. The surplus of foreign trade will significantly exceed the level that we expected in February. However, the influence of these additional export earnings on the ruble exchange rate will largely offset by the fiscal rule mechanism. Thus, the resumption of fiscal rule-based operations will have a stabilizing effect on the foreign exchange market. I will now speak of risks. As for the budget, its expenditures in Q126 considerably exceeded both their seasonal norm and the elevated values of 2025. In previous periods when the dynamics of expenditures at the beginning of the year were elevated, they were usually followed by larger expenditures and a more notable budget deficit for the year as a whole. We're now expecting the updated budget parimeters for this year. The general logic remains the same for us. The larger is the fiscal stimulus, the lower should be the growth rate of the second component of money supply, that is lending. This means that all else being equal, the key rate should be higher. An important risk related to external conditions is the situation in the Middle East. If the conflict drags on, the adverse effects for the Russian economy will be strengthening. The implications caused by global rise in costs might turn out to be more serious than the benefits from larger exports and a stronger ruble. Disinflationary risk is a more considerable cooling in domestic demand than assumed in our baseline scenario. Winding up, I would like to comment on our future decisions. We have currently reached the point where demand overheating has almost dissipated while inflation has not yet returned to its low rates due to the time lags of monetary policy transmission as well as heightened inflation expectations. According to our forecast, the accumulated tightness of monetary conditions will help bring underlying inflation down to 4% in its sustainable part in H226. Nevertheless, our further key rate decisions will largely depend on how the situation will be unfolding and to what extent the risks I mentioned will materialize. Thank you for your attention.

Colleagues, please your questions and don't forget to introduce yourselves and identify your agency. Rita, please.

Thank you very much for the question. We reviewed two options, keeping the rate and lowering it by half a percentage point. I will tell you right here and now those who were in favor of keeping it as it was noted that in the sustainable part, inflation hasn't been going down since the middle of last year, staying at the level of four to 5%. And so one needs more convincing evidence to show that the sustainable process of the inflation going down as well as noted the higher proinflationary risks with regard to narrowing the forecast range of the key rate this year. First of all, it is related to the fact that part of the year has already gone and in terms of inflation, we're currently moving at the upper part of our forecast range. That is why we lifted the lower part of the range by a half percentage point. Pauses are always possible and our signal about appropriateness of such a decision contains such breaks such pauses it will all depend upon the data even when the signal points towards more moderate decisions the pause is possible.

Colleagues, please. Rita in the second row.

Yes, against the current oil prices exactly the national wealth fund could be further topped up. But as far as the fiscal rule is concerned, we saw that the ministry of finance previously made an announcement that is not going to reconsider any social cut off and will go back to the fiscal rule and at the same time will take into account the previously deferred operations. So in terms of the annual indicators this is neutral because that may generate an effect only within the yearly dynamics. Yeah. Well the fiscal rule never was put or put on stop because there was a pause in transactions in the exchange market related to the fiscal rule. Colleagues please. Maria.

The short answer is it will. Now the question is what kind of the key rate trajectory will be required for that. We will further specify it as the situation in the economy unfolds and how convincing the inflation slow down is as well as the inflation expectations going down. Something that you also refer to. Of course, we would feel much more comfortable to pursue our monetary policy if the inflation expectations were to be anchored at a much lower level. But we are aware that it's a higher level. I mean it's straightforward right now in terms of the uncertainties and the risks that we see around and particularly the longevity of the high inflation period. So the high inflation expectations amongst other things is also one of the reasons as to why we slightly have raised our key rate forecast for next year and we will definitely will be gauging our decisions to the inflation expectations dynamics.

Gasimonova is coming next from Kamchatka media from the Petropol of Kamchatka city.

Well indeed it seems that if the demand for staple goods is not really dependent upon the prices which is the case the price for such products like bread will continue growing endlessly. But that doesn't happen. Let's consider why what exactly our key rate can do. Certainly, it cannot combat the price growth per individual services and goods. But most importantly, it may curb the general price growth and our task is exactly not to allow for an uncontrolled price growth over the board for bread, for medicine, for milk. Uncontrollable price growth and very accelerated price growth happens if there's more and more money in the economy but in terms of goods and services they are not catching up and that is why just imagine if we were not to raise a key rate when prices start spiraling what happens in such a period manufacturers begin hiking prices because they see strong demand in response People are demanding wage growth and it becomes a vicious circle. Prices are growing, wages are growing, business again raises prices and in fact inflation eats at households incomes and any growth in wages and the first ones to suffer here are the pensioners and lower income categories which cannot participate in such a race. And so increasing the key rate we effectively create the possibility to sever this vicious circle whenever in the economy the amount of money is not growing uncontrollably. The people and companies are more prudent in spending and manufacturers are not having this temptation to raise prices endlessly. Even for the staple goods prices don't go so fast but the competition is so important here. If the bread becomes more expensive in order for there to be a different producer who can sacrifice part of its margin in order to broaden an offering in the market and so competition is a crucially important element to contain price growth and this is super important for such product as staple goods. Oh maybe I would also like to add that staple goods they are in the area of special attention by the government and the government is undertaking measures amongst other things to restrict price growth for such goods like for example subsidies to the bakery industry from to millers export tariffs for example right now to stabilize grain prices the so-called rice dampening pricing is being used because whenever the price is high, the grain exporters are paying higher duty in these money is offered as subsidies to the grain producers. This is also another important factor to restrict prices for staple goods. But the key rate is effective as well. Not momentarily but it protects the households and their income so that people have enough money and everybody has enough money for everything they need for their everyday lives.

Julia in the third row please.

Thank you. Well, as we have already mentioned, we are observing the whole conundrum of the macroeconomic indicators. But in order to first of all, we are currently reducing the rate. But in order to either reduce more abruptly, I mean the key rate or in order to pursue a softer stimulating monetary policy, we need inflation to fall below the target. For the indicators to show considerable unemployment growth but neither this nor that is what we are seeing currently and not only in our forecast but also the businesses and the analysts point to that. Please Mr. Zabotkin.

Your colleagues please Nasha in the second row.

Well, I mean, you definitely should know that there is a debate going on right now about the possible changes of the budget parameters and in order to come to a final conclusion, we need the budget parameters to be officially announced. That is what we're looking forward the government for the government to do. But the logic is the same. The high is the budget spending or more importantly I mean if there will be structural primary structural budget deficit that would require much tighter monetary policy which would mean no what does the primary structural budget deficit means it means that through the budget channels more money will flow into the economy which means that the space for the private lending will be narrowed this is something that we will take into account but in the meantime while the parameters are not being announced in this debate. We understand that this risk remains. It exists. It has strengthened and I would like I would wish to say we're less confident in the disinflationary contribution on the side of the budget as was had been originally expected in the budgetary bill. Now as far as the narrowing of the range of the key rate is concerned as I said inflation based on our estimates and based on our analysis is flowing along the upper threshold of the forecast range and yes against all other things be equal that would mean less room for the key rate to be brought down.

Dear colleagues, please. Marina in the second row.

You're quite right. Humanity needed 50 years in order to go back to the moon. We will also go back to the 4% inflation. I'm quite sure of that and I'm sure that it will happen much faster.

Thank you dear colleagues. Anastasia please in the third row.

Thank you for your question. Well the statement about the overcooling is something that we do not agree with as Mr. Zabotkin before mentioned because you know talk about overcooling you have to have the evidence to really prove it. First of all that is in the considerable unemployment growth and that the inflation is falling much below the targets and that the household incomes are falling. Neither the first nor the third or the second for that matter are there but indeed in the Q1 the economic activity rate has slowed down and the rate growth in January and February speaking about January February turned out to be slightly lower than our expectations to a considerable part. This is explained by the time factors that the president noted Canada's three less three business days and the weather conditions which nobody could forecast in the end of the year which considerably impacted individual such important sectors as construction and development. The consumption also slowed down after the spike it demonstrated in the end of last year and the businesses needed some time in order to adjust themselves to the new tax changes which is a bit difficult to really foresee in terms of how this adjustment may turn out. But based on the frequency data in March and April, not just only frequency data in the meantime, we see that the economy is rebounding is returning to its growth path. And that is being demonstrated not only by the quantitative frequency data. We also see it through different surveys which we did for example one in April and the current assessment of the business environment has been improving and the business expectations for the next three months have also improved. Now in tri yeah fluctuations may take place but whatever happened in the first quarter I mean these changes of the rates I mean them turning out to be lower compared to what we've expected that didn't lead us to changing our forecast for the current year. We kept our forecast in terms of the economic growth bearing in mind the redistribution of the working days between the first and the second quarter. A more precise picture is what we're going to see closer to the end of H1 to our mind individual months and even the first and the second quarter separately should not be interpreted because that may lead to an incorrect conclusions with regard to the transforming. One other thing that I would like to remind you because people often oversee it because the kind of dynamics that really forms up during the first quarter, it reflects the consequences or rather the level of the tightness of the monetary policy of a year ago because we went through the peak of the tightness of the monetary policy. So right now we see this effect from the reduction of the rate and this particular effect is not going to be an instant something.

Dear colleagues please. Oh yes I see we have a question coming online from Pisman from Bloomberg please.

Well thank you thank you for your question. Yes, indeed. We're trying to use AI whenever we see a good outcome from a in the first place as an assistant when doing certain routine things when analyzing information and data. That when we discuss the monetary policy or making our decisions we don't use it one in an analysis work when we do the primary data analysis we use AI but in the meantime in terms of higher level decisions AI cannot displace professionals.

Please next one Reuters.

To answer our first part of the question is except that the data is too noisy you know to be able to make an assessment particularly as you know with regard to the GDP and the quality distribution thereof are always being specified and with quite a lag. Alexei please.

Colleagues, Anastasia.

Thank you. As I already mentioned, we don't see overcooling risk. There are overcooling indicators that we see unemployment, inflation below the target, household income decline. Neither of these we see but we believe that we're already close to a state when the demand over cooling has been exhausted. You see, that's very important. It is also important for it not to restart itself again. So, we need to pursue a very cautious monetary policy. But we of the opinion of the opinion that we're currently at the point where the production opportunities and the expansion of the goods and services production are in line with the demand growth rates that we see. Mrs. would you like to say something? No. Thank you. Dear colleagues please.

Well, I mean, but the labor market is still bears a lot of significance. You know, the wage growth, not only the wage growth or unemployment, but what's the dynamics both in the wage growth and productivity growth? If the wage growth is seriously ahead of the labor productivity, I mean, how much for example a worker may produce products and services, it all translates itself into the price growth and we may end up having the inflation spiral like I've mentioned before. And so the wage growth and the inflation growth will ensue from that. We currently are seeing that the tension in the labor market is diminishing. And this is not as much as the unemployment indicator rather than the adaptation of the labor market happening via different factors not only via unemployment and actually we are also closely monitoring situation with the partial employment. Yes indeed there is a bit of a growth there but in aggregation it's about 300,000 people and this is just not the kind of an indicator that would add to the effect you are right about unemployment but I should tell you that investments have grown strongly over the several previous years even despite the fact that last year investments somewhat went down comparing it to 2021 the level of investments is currently is by quarter larger. So there is a considerable investment growth which we are hopeful eventually will translate itself into labor productivity and into this overall growth. So situations may differ in different sectors but I shall repeat it again that such an overflow of labor into more effective application with a greater output. I mean the labor productivity is very important for structural change and generally I mean the key rate in the monetary policy principle is not intended to solve structural problems. However what you are referring to is important for us to make our decisions with regard to the monetary policy. So definitely we are closely monitoring and analyzing labor market.

We view there was another wave in the April round. You can see that since the middle of 2024, the availability of labor to businesses is improving, but it remains less. Still, there are more businesses which are saying slightly more than a half. It is less than it used to be back in 2021. We haven't yet gone back to that equilibrium in the labor market which we had until 2022, and that keeps up the situation within which competition for labor increases the labor costs, and that remains the factor which supports inflation still above the target level.