Elvira Nabiullina: Review of recent inflation developments in Russia
and economic outlook
Statement by Ms Elvira Nabiullina, Governor of the Bank of Russia, in the follow-up to the Board
of Directors meeting, Moscow, 24 April 2020.
* * *
Today, the Board of Directors has decided to cut the key rate by 50 bp to 5.50%
per annum. This implies that we have switched to accommodative monetary policy.
Moreover, we hold open the prospect of further key rate reduction if the situation
develops in line with the updated baseline forecast of the Bank of Russia.
Our today's decision is based on the profound revision of our view of economic development
and inflation trends in the next three years.
Since the last Board of Directors' revision of the key rate, three events have happened which
have defined our view of the situation. They are primarily associated with the spread
of the coronavirus pandemic. Firstly, this is a drastic decline in the global economy. Secondly,
there has been another round of a slump in oil prices, despite the new OPEC+ deal. Thirdly,
the Government has introduced nation-wide restrictions. As a result, a large number
of businesses have suspended their operations or switched to the remote work mode.
A lot of citizens are currently in self-isolation.
As to positive factors, I would focus on a slight stabilisation in global financial markets
as compared to March, which was largely driven by measures being implemented by the central
banks of reserve-currency countries.
Therefore, given all the developments, we have completely reviewed our economic forecast.
Our today's decision relies exactly on the forecast, and not on the latest statistics
we are receiving. The statistics still show the previous month's situation and cannot provide
a clear view to estimate further trends. Building our forecast, we were rather taking into account
leading indicators of the economic situation, including data on electric power consumption,
financial flows, household spending, as well as the experience of other countries where
the pandemic has been spreading for a longer period.
I will now dwell on the main assumptions behind our baseline forecast.
Our forecast relies on a conservative view of oil prices, especially in 2020. We assume that they
will be slowly growing from the average level of USD 15 per barrel in the second quarter
to USD 25 per barrel in the fourth quarter. There are large oil stocks accumulated, with a downfall
in global demand. This will limit the recovery of oil prices, even if the new OPEC+ agreement
is fully complied with. Further on, oil prices are expected to gradually rise to USD 45 per barrel
in 2022 as global demand picks up and oil stock levels decrease.
Another key assumption of our forecast is the duration of the coronavirus pandemic
and the restrictions implemented in Russia and abroad. Our estimates suggest that
governments will be gradually lifting or considerably easing the majority of current restrictions
in the second quarter. In this case, we can expect that in the third and fourth quarters economic
activity will be recovering quarter-on-quarter.
The will be returning to normal step-by-step. The direct adverse impact
economic situation
of the restrictions primarily falls on this quarter, while their secondary effects will continue
to manifest in the future. According to our surveys, over 80% of the businesses across various
industries have been experiencing the influence of the coronavirus pandemic and current
restrictions. Companies' business sentiment has materially declined. It will take time to restore
business processes, logistics and production chains, offset the reduction in profit and revenue,
build up reserves and savings that have been used to a greater or lesser extent over the second
quarter. Combined with uncertainty regarding potential changes in the external environment, this
will limit production, investment and consumer activity. In these conditions, GDP will shrink
yearon-year in the third and fourth quarters, that is the annual rate of economic growth will
be negative.
According to the Bank of Russia's forecast, GDP will overall decrease by 4-6% in 2020.
The major contributor to this reduction will be a decline in exports that may reach
from 10% to 15%. Moreover, fixed capital investment will also substantially decrease (by 6-
10%) compared to the previous year. Companies will be primarily using their financial resources
to restore their daily operations. Uncertainty about the prospects of domestic and external
demand will be confining investment plans. The decline in production and investments will
be confining the opportunities for an upturn in income. Consumer demand will be shrinking.
The measures implemented by the Government and the Bank of Russia will support
the economy, and specifically the most affected industries.
Economic growth in 2021-2022 will largely be recovery-type. According to our forecast, GDP will
expand by 3-5% in 2021 and by 1.5-3.5% in 2022. GDP growth will be promoted by a further
implementation of national projects. However, our baseline forecast factors in only the already
effective budget support measures.
An upturn in the economy and domestic demand will also be driven by the easing of monetary
conditions resulting from the monetary policy pursued. This will support lending, and its growth
rate will rise from 3-8% this year to 6-11% in 2021-2022. The lending potential will also
be maintained owing to the regulatory easing and the expansion of the Bank of Russia's
specialised refinancing instruments.
According to our estimates, the easing of monetary policy is needed to maintain
annual inflation close to 4% over the forecast horizon. The slump in domestic and external
demand this year will be considerably containing inflation, which induces the risk of its substantial
deviation downwards from the target in 2021 and over a medium-term horizon if no additional
monetary policy measures are introduced.
The disinflationary pressure of weak demand will offset the effect of temporary proinflationary
factors, that is, the ruble weakening and the observed elevated demand for individual products,
already this year. We believe that a rise in inflation expectations caused by the above factors will
also be temporary.
We expect that the impact of limited demand on inflation will be stable and long-lasting. Given
the transmission lag of monetary policy, we should take actions already now. Based
on our forecast, annual inflation will reach 3.8-4.8% by the end of the year amid the easing
of monetary policy, and will further on stabilise close to 4%. Moreover, we expect a reversal
of inflation trends in the middle of the year. Monthly inflation in annualised terms will begin
to go down, while annual inflation will still continue to rise.
As to the balance of payments, we expect that the current account balance will decline
to negative values in 2020 and 2021 (to USD 35 and 18 billion respectively). This will mainly
result from the slump in exports caused by the reduction in external demand and in export
revenues, primarily from oil sales.
I would like to point that the temporary switch to a current account deficit is an expected effect
produced by the considerable oil price downturn under the influence of the fiscal rule. Receipts
from fiscal rule-based foreign currency sales make it possible to support the economy
and domestic consumption. In this situation, imports are contracting to a lower degree compared
to exports driven by the decline in oil prices. As a result, the current account balance will drop
to negative values. In 2022, when the oil price exceeds the cut-off level, the current account
balance will return to positive territory and the accumulation of reserves will be resumed via fiscal
rule-based foreign currency purchases.
We do not expect a noticeable change in the private sector financial account balance over
the forecast horizon. According to our estimates, the private sector financial account deficit will
reduce from USD 18 billion in 2019 to USD 15 billion this year. This is linked to decline in GDP,
decrease in economic revenues, as well as less possibilities for borrowing in foreign markets
at the end of the first quarter - the start of the second quarter amid intensified volatility
and uncertainty. Further ahead, as global markets stabilise, the potential for external bollowings
will recover and this will pass through to a reduction in the private sector financial account deficit
to USD 10 billion in 2021-2022.
This baseline scenario, without doubt, has many uncertainty factors. They concern both
the duration of the restrictions in Russia and worldwide, and the pace of recovery of the global
and Russian economies. Besides, new spikes of volatility may occur in global financial
and commodity markets. Therefore, in our discussions of the key rate decision and its path,
we have a proper regard to the objective of sustaining financial stability.
As I noted, the baseline forecast incorporates only the fiscal decisions already made
by the Government. We assume that further on the situation may require additional decisions
to support the economy. This will foster an alleviation of effects of the restrictions for households
and businesses, accelerate the return of economic activity to normal, and also mitigate the risks
of inflation deviation downwards from the target over the next quarters. In the course
of our key rate discussions, we considered model estimates of the influence of such additional
fiscal measures on GDP, inflation and the monetary policy path.
We will certainly consider possible developments in fiscal policy, in the Russian and global
economies in the course of further adjustments of our baseline scenario. Nonetheless,
our current analysis suggests that virtually all possible scenario variants allow for monetary
policy easing, including amid a certain additional expansion of fiscal measures designed
to support the economy.
The Board of Directors proceeds from the existing potential for cutting
the key rate and discussed possible options at the current and next meetings. The discussion
concluded that given such extraordinary developments, it may not prove sufficient to adjust
our policy by employing the small-step method we used. To return inflation to the target
and stabilise the situation in the economy, we may need to implement more decisive measures.
At our today's meeting we have decided to
cut the key rate by 50 bp to 5.50%
per annum. We continue to see the potential for the further easing of monetary policy at our next
meetings.
I would also like to note that, given the key rate change, we have decided to cut from 4.0%
to 3.5% per annum the interest rate under the new Bank of Russia's SME lending support facility
introduced several weeks ago. We believe this will help to additionally improve the affordability
of loans for small and medium-sized enterprises, which were affected the most by hardships.
And a few words in conclusion. The current situation specifically requires timely and even
forward-looking decisions so that we are able not only to curb negative trends in the economy,
but also to set grounds for a faster normalisation of the economic situation after the withdrawal
of the restrictions. This will influence both inflation dynamics and the economy recovery path.
Therefore, the Bank of Russia is monitoring the effects of its earlier decisions promptly
and on an ongoing basis, and stands ready to take further steps, both in the monetary policy
sphere and in the areas of its activity.