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, 23 July 2021.
* * *
Good afternoon,
We have made the decision to raise the key rate by 100 basis points to 6.50% per annum.
Our today's decision is based on the updated macroeconomic forecast that was significantly
revised. The growth of the Russian economy sped up in the second quarter, and inflationary
pressure turned out to be higher and more persistent than forecast. Some sectors are already
demonstrating signs of overheating. Inflation expectations also continued to go up. Given
the observed trends, we have revised our inflation forecast upwards by one point. This year, it will
equal 5.7-6.2%. The important step in our policy, which we have made today, is needed to bring
inflation back to the target. We expect inflation to slow down to 4.0-4.5% next year and stay
close to 4% further on. Nonetheless, our policy will not contain the steady rates of economic
growth.
I would now dwell on the factors behind our today's decision.
I will start out with inflation. As of 19 July, inflation was 6.5% in annualised terms. This
is considerably above the target and is close to five-year peaks. High growth rates are driven
by both temporary and steady factors. According to our estimates, steady factors dominate
at the moment. They are associated with the fact that expanding demand in many industries
exceeds their potential to ramp up output and imports. This accelerates price growth as well.
As to the product groups where prices rose the most in the second quarter, these
are construction materials, furniture, and cars. When people expect prices to rise faster, they
decide to make large purchases earlier. To do this, they use both savings and borrowings.
Growth in consumer lending again sped up to a quite high rate, which was driven
by accommodative monetary policy, among other things. On the other hand, accommodative
policy lowered the demand for bank deposits, especially given accelerated inflation.
There are also other markets where price growth was rather caused by one-off factors
and limited supply. This is tourism, for instance. Only a part of foreign destinations have been
reopened, whereas Russian resorts' infrastructure is still insufficient to accept the entire tourist
flow. As a result, prices for tourism services soared, which also sped up inflation in June.
Furthermore, May-June recorded a surge in prices for such vegetables as cabbage, potato,
carrot and beetroot, which was because 2020 harvest stocks started to end before
the new harvest supply. However, the contribution of such one-off factors to overall inflation
is smaller than that of steady factors. The increase in prices for these everyday products is very
noticeable and significantly impacts inflation expectations.
June and the first half of July showed the first signs of weakening inflationary pressure, this is still
not enough to speak of a steady decline in the inflation rate. In July, households' inflation
expectations continued to rise. In these conditions, even one-off factors might have a
longerlasting impact due to their secondary effects. To prevent this, it is essential to create conditions
that would encourage the propensity to save. For this, we need higher interest rates. We should
not tolerate high inflation expectations in order to prevent their anchoring at this high level
and avoid a more significant increase in the key rate that would be needed further on in this case.
The second topic is the economy. According to our estimates, economic growth sped
up considerably in the second quarter. High-frequency indicators show that Russia's
economy has bounced back to its pre-crisis levels. Output in two-thirds of the major industrial
sectors already exceeds pre-crisis levels, and this upward trend continues. Oil production
has not restored yet. Output has also not recovered in international air transportation and hotel
and restaurant business. However, this was due to remaining anti-pandemic restrictions, rather
than insufficient demand.
Moreover, the pandemic drastically affected the structure of demand and supply. In my previous
statement, I mentioned the changes caused by the transfer of a significant portion of employees
to work from home, as well as the elevated level of inventories now formed by companies.
Replenishing their inventories, companies substantially increased their demand for commodities
worldwide. Russia is a major producer of key commodities. High demand for Russian exports
spurs economic growth this year. As companies complete their inventories, the effect of this
factor will be tapering off gradually.
The growth of oil export quantities will also be supported by the easing
of the OPEC+ oil production cuts in response to the recovery of demand. Taking this into
consideration, we have raised the oil price path in our forecast by 5 US dollars per barrel
in the next three years. According to our preliminary estimates, the expansion of oil output under
the new OPEC+ agreements will add about 0.1 pp to GDP growth this year and 0.2-0.3 pp next
year. Another important growth driver is domestic demand, including both consumer
and investment demand. Considering these trends, we have revised our economic growth
forecast for this year upwards from 3-4% to 4-4.5%.
After the recovery, the economy will expand at a pace close to its potential. We forecast
that GDP will equal 2-3% in the next two years. The possibility to achieve higher economic
growth rates will depend both on the expansion of production and logistics capacities
and on labour resources, their expertise and performance.
Third. Monetary conditions have been progressively adjusting to the earlier increases
in the key rate, but are still accommodative.
The yield curve of federal government bonds, which is used by banks as a benchmark
for the interest rates they set for their clients, has significantly increased for maturities
of up to three years, while staying almost unchanged in the long end. The rise in short-term
yields reflects both our recent decisions and market expectations regarding the future key rate
path. Shifts in long-term yields are minor. Among other things, this is an evidence of market
participants' confidence that monetary policy will finally bring inflation back to the target. I would
like to reiterate that these are long-term interest rates, rather than our key rate as such
(as is often stated), that determine the affordability of credit for companies' investment purposes
and of mortgage loans.
As compared to yields on federal government bonds, interest rates on loans and deposits have
responded more slowly and rose less significantly. Our today's decision is aimed at accelerating
this process. An increase in interest rates will help restore households' propensity to save.
Growth in retail and corporate lending is close to its highest rates recorded in recent years. Many
borrowers seek to take out loans as soon as possible at lower interest rates. We have raised
our lending growth forecast for this year. Mortgage lending will continue to expand fast, while
slightly decelerating after the amendments to the subsidised mortgage lending programme
become effective. Speaking of unsecured consumer lending, we can already observe the first
signs of overheating. This lending segment has been growing faster than we forecast in April.
On 1 July, we returned risk weights for consumer loans to the pre-pandemic level. However,
given recent months' data, we will soon make a decision on additional macroprudential
measures to cool down this segment of the retail market.
I will now speak on possible risks to the forecast. Proinflationary risks continue to prevail.
We consider that the main risk is a potential anchoring of inflation expectations at a high level.
Fuelled by high inflation expectations, temporary growth might become sustained.
There is a slight increase in risks associated with a possible faster normalisation of monetary
policies in advanced economies. As a result, market volatility in emerging market economies
might intensify, which can affect exchange rate and inflation expectations.
There are also certain risks caused by structural changes in the labour market
due to the pandemic. The demand for some professions is declining, whereas the demand
for others is rising. This is confirmed by data on a record-high increase in vacant jobs. Adjusting
to the new needs of the economy requires time for specialist retraining. Consequently, this
provokes local staff shortages. The situation is aggravated even more due to the restrictions
on the inflow of labour migrants, which affects construction and seasonal agricultural works most
seriously. The situation in the labour market might increase companies' costs.
Proinflationary risks associated with the environment in global commodity markets persist.
Nonetheless, June-July recorded the first signs of a decline in world prices. Therefore, I would
say that this risk is less acute than at the moment of our previous key rate meeting.
Furthermore, investment from the National Wealth Fund and geopolitical risks are still
in the focus of our attention.
Disinflationary factors are much weaker.
A rich harvest might result in a more significant seasonal decrease in food prices.
The pandemic situation is still uncertain. The spread of new coronavirus strains worldwide might
force countries to introduce new restrictions and disrupt production and supply chains, which
in turn might slow down global economic recovery. For Russia, this would involve a decrease
in external demand and intensify disinflationary risks, on the one hand. On the other hand,
if borders are closed, domestic demand will remain elevated longer, which might become
a proinflationary factor.
In conclusion, I would like to comment on monetary policy prospects. Beginning from March,
we have raised the key rate by a total of 2.25 percentage points. We will assess how our earlier
decisions have been influencing monetary conditions, aggregate demand, and inflation. We will
also consider how quickly supply-side constraints have been weakening and, accordingly, what
level of the key rate is needed to bring inflation back to the target. According to our revised
forecast, the average key rate next year will equal 6.0-7.0% per annum. Further on, as inflation
expectations go down and inflation decelerates, the key rate will return to its long-term neutral
range. We still estimate this neutral range to be at 5-6%, provided that inflation is close
to the Bank of Russia's target of 4%.
Thank you all for your attention.