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, 22 October 2021.
* * *
Good afternoon,
W e made a decision to raise the key rate by 75 basis points to 7.50% per annum. This
is a significant increase and, obviously, this is not a fine-tuning exercise. This decision is driven
not only by the current pace of inflation, but primarily by high inflation expectations
and a considerable revision of the forecast compared to July. Inflation will be going down from
a higher point than we assumed. This will require a greater tightening of monetary policy than
we planned in our July forecast and expected in September.
I will now explain in detail why we have made this decision.
First of all, I would like to talk of inflation.
In August and especially in September, inflation significantly exceeded our forecast. During
the first weeks of October, we could see no signs of a weakening of inflationary pressure.
Although the sudden surge in inflation that occurred in September was provoked predominantly
by temporary factors, we consider this situation as potentially dangerous as it affects inflation
expectations. I would like to remind you that inflation soared in September due to a smaller
vegetable harvest and higher costs in livestock production. Meat, milk, and vegetables
are all the so-called marker products. When prices for marker products surge, even if their share
in the consumer basket is rather small, this might speed up inflation expectations. This is what
we observed in sugar and sunflower oil prices last year. Today, inflation expectations
are already high, and this impact might be even stronger.
Inflationary pressure is still spurred by higher prices in global markets. Recently, prices for food
products, coal, non-ferrous metals, and especially natural gas continued to trend upwards.
Increased gas prices are pushing up prices for nitrogen fertilisers, which might ultimately
become an additional driver of pressure on prices in food markets put by agricultural enterprises'
costs. However, there are also goods demonstrating a stabilisation of prices and even their
adjustment downwards. These are steel, iron ore, precious metals, and lumber. Nonetheless,
we cannot be confident yet about how steady these trends are. Global markets remain a source
of elevated inflation risks.
However, the question is not only and not so much about transitory factors. It is more important
that the indicators of steady inflation are above the target. This is about demand-side pressure,
or to be more precise, about a considerable gap between the current level of demand
and the potential of supply to meet such demand. It is not always possible to build up production
capacities quickly. Supply may adjust to demand more slowly due to limited capacities,
a shortage of components and raw materials, logistics bottlenecks, and - with regard
to the economy in general - due to the lack of a sufficient number of workers.
It may take a long time to overcome these restrictions and ramp up supply. Until these problems
are solved, elevated demand will not turn into higher consumption, but will only translate into
an increase in prices for those consumers who will be ready - or simply forced -
to buy products at higher prices. All other consumers will be unable to purchase more expensive
goods. This is exactly what we are observing now. The situation with cars is probably the most
telling example.
Excess demand, which cannot be met through an expansion of production, is not a source
of additional economic growth. In such an environment, producers have the opportunity to easily
pass their extra costs on to consumers. Hence, this discourages companies to enhance
production and labour efficiency.
Today, demand is fuelled by high inflation expectations. After the decrease in August
and September, households' and businesses' inflation expectations are rising anew and have
already returned to the peaks recorded in recent years. The longer inflation expectations stay
elevated, the more we need to tighten our policy in order to bring inflation back to the target.
We have considerably raised our inflation forecast for this year, as compared to July, namely
to 7.4-7.9%. We have also increased the forecast range of the annual average key rate
for the next year by 1.3 percentage points, as compared to July. Considering such policy, inflation
will decline to 4.0-4.5% next year.
I will now speak of the economic situation. Except oil production subject to the OPEC+ cuts,
the economy generally bounced back to its long-term growth trends in the second quarter
and even exceeded them in a number of industries. Growth slowed down in the third quarter,
which is evidence that the recovery had completed. It should be noted that the third
quarter GDP was affected by a decrease in harvest and the worsened epizootic situation.
Excluding agriculture, we estimate that GDP growth quarter-on-quarter was positive.
Consumer demand remains the main contributor to the growth. One-time payments
to households also supported consumption. The surveyed companies expect a further expansion
of demand. According to the data on GDP for the second quarter and recent statistics
for the third quarter, gross fixed capital formation also grows fast this year, and even faster than
we assumed in our July forecast.
The oil industry is a large sector where there is still a substantial space for the recovery growth.
The OPEC+ is gradually easing the oil production cuts. Furthermore, the environment
in the global markets of energy commodities has improved considerably. We have raised
the forecast oil price for 2021 and 2022, specifically to 70 and 65 US dollars per barrel,
respectively.
I will now briefly talk of the situation in the labour market. The unemployment rate has decreased
close to its record lows, while the number of vacant jobs has approached its record high. To fill
the new jobs, we need either an inflow of labour migrants, or a redistribution of the current labour
force among regions, industries, and enterprises. This process is objectively slower than
the return of the available labour force to work during the period of the recovery growth. A higher
competition for specialists between employers is promoting the conditions for an increase
in wages. It is essential that a rise in wages is consistent with the growth of labour productivity
in the relevant sectors. Otherwise, it will entail higher costs which enterprises will pass
on to consumers, and the rise in nominal wages will be ultimately absorbed by inflation.
We keep our GDP forecast unchanged for the next year and further on. An additional tightening
of monetary policy aimed at returning inflation to the target is coherent with the positive
contribution of external demand and investments from the National Wealth Fund made
to aggregate demand. GDP will increase by 4-4.5% this year and by 2-3% further on, which
is in line with the sustainable growth path.
Monetary conditions have changed only slightly after the September
meeting. An increase in market rates following the rise in the key rate currently has only a limited
effect on them. This is largely associated with the impact of higher inflation expectations. Lending
growth rates remained high in all segments, which is the main indicator evidencing that monetary
conditions remained accommodative, rather than neutral in the third quarter as well.
Over the period from the September meeting to yesterday, yields on federal government bonds
rose by 50-60 basis points. The increase in short-term yields suggests a revision of market
expectations regarding the key rate, whereas growth in long-term yields is driven by the trends
in global markets.
Deposit rates continued to go up in September-October, although more slowly than
in the previous months. Deposit terms are not yet sufficiently attractive to boost households'
demand for this form of savings.
As regards lending, the corporate segment continues to expand steadily. Growth in consumer
lending has slowed down somewhat. As regards the mortgage segment, after a slight
deceleration in July-August due to the revision of the subsidised mortgage lending
programmes, growth sped up again in autumn. In this context, we have revised our forecast
range of retail lending growth for this year upwards by 3 percentage points to 21-
25%. The forecast for lending in the economy in general remained unchanged. Currently,
the actual changes in the credit market are obviously not sufficient to form such monetary
conditions that would help bring inflation back to 4% and stabilise it at this level. Our today's
decision will accelerate the adjustment in the credit and deposit market.
As regards risks to the forecast, proinflationary ones currently prevail.
The main risk is that inflation expectations stay elevated for a long time. The longer the price
growth rate remains high, even if fuelled by temporary factors, the more considerable this risk is.
We could already observe this over the recent three months.
As regards external conditions, proinflationary risks persist as well. In the first place, they
are associated with prices for energy commodities and other commodities. The damper
mechanisms protect the domestic market against fluctuations of global prices for commodities.
However, an increase in foreign producers' costs might also affect inflation in Russia.
For instance, this happens when we import foreign equipment and vehicles made of more
expensive metals.
Disinflationary risks are mostly associated with the fact that producer costs might decrease
as fast as they have risen. We have recently observed a multifold increase in prices for container
shipments. This has pushed up cargo delivery costs worldwide. However, this growth
has stopped by the moment. Possibly, even if prices do not decline to pre-pandemic levels, they
might adjust downwards considerably closer to their initial level of this year, and later on this will
translate into product prices.
Another important disinflationary factor is still recovery prospects in outbound tourism.
I should focus on the anti-pandemic restrictions that are currently introduced. Last spring,
we believed that restrictions would cause a slump in demand, that is, provoke disinflationary
risks. This is exactly what happened in the second quarter of 2020. However, the experience
of the subsequent waves of the pandemic has proven that restrictions are impacting demand
increasingly less, whereas supply contracts when enterprises are forced to suspend operations.
We consider that restrictions rather have a proinflationary influence now.
The industries that directly depend on restrictions, primarily services, will be affected most
considerably. The Government has introduced support measures to aid the most vulnerable
industries, first of all small and medium-sized enterprises and their employees. The Bank
of Russia, on its part, has allocated a limit of 60 billion rubles within a special 4% refinancing
programme for the banks that would issue loans on preferential terms to small and
mediumsized enterprises affected by restrictions.
We have also recommended that banks and microfinance organisations should approve
restructuring applications for those individuals and entrepreneurs who need this.
It has become more probable that the level
I will now speak about our future decisions.
of the key rate will be higher, and the period during which the key rate might stay at this elevated
level will be longer than we assumed in our previous forecast. According to our baseline forecast,
the key rate will average 7.3-8.3% per annum next year, and 5.5-6.5% per annum in 2023.
In other words, the key rate will return to its long-term neutral range no earlier than in the middle
of 2023.
Thank you for attention.