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, 18 September 2020.
* * *
Today, the Bank of Russia has decided to maintain the key rate at 4.25% per annum.
Why have we made this decision, although we do see room to further ease monetary
policy under the baseline scenario?
Firstly, in recent months inflation has been slightly higher than expected. This trend
has been driven by both a rapid revival of consumer demand after the lockdown period
and the weakening of the ruble in July - August. We estimate that short-term proinflationary
risks have slightly risen again, while disinflationary risks somewhat decreased. However,
disinflationary risks still prevail in the medium run.
Secondly, the external environment has become more volatile. There are rising concerns
about the pace and sustainability of the recovery in the global economy, especially considering
that in recent weeks the pandemic situation has worsened to a certain extent in a number
of countries. Geopolitical risks have intensified.
Moreover, we also considered the following factors when making our decisions.
Inflation expectations remain elevated, affected by price and exchange rate movements
and the persistent uncertainty over further developments.
The companies we survey are reporting rises in costs due to higher input prices. Moreover, they
incur extra costs since they need to comply with the sanitary and epidemiological requirements.
Concurrently, businesses assess demand for their products as weak. This limits their capacity
to pass through increasing costs to end product prices. However, as demand bounces back, this
pass-through may occur. And so businesses' price expectations may also increase.
As regards households' inflation expectations, in August we were able to resume our regular
monthly surveys. Today, we have the opportunity to comprehensively assess new survey
results, comparing them with pre-pandemic data. Households' inflation expectations have
certainly risen, specifically by one percentage point against March. However, I should stress that
their response to the drastic change in the situation this year has turned out to be much less
intense than before. This evidences that they are more anchored since inflation has been staying
at its record lows over recent years.
I would like to emphasise that this stronger anchoring of inflation expectations is exactly what
enabled us to promptly shift to accommodative monetary policy, significantly cut the key rate,
and act countercyclically.
However, what is the reason behind our concerns about the rise in inflation expectations? There
is a risk that they may again stay elevated for a certain time, thus impeding a steady anchoring
of inflation close to 4% and affecting the flexibility of monetary policy further on.
Monetary conditions continue to adjust to the earlier significant key rate reduction.
Interest rates in the credit market are going down, with lending amounts having considerably
expanded. Owing to financial stability in the banking sector, the key rate decrease has quickly
and successfully translated into the easing of monetary conditions and supported the economy,
despite higher credit risks. Unlike the previous crisis periods, this year we have managed
to prevent a contraction in lending.
In addition to the key rate cuts, lending is also promoted by the regulatory easing and other
measures implemented by the Bank of Russia. The preferential programmes launched
by the Government are another important contributor to the easing of monetary conditions.
In particular, preferential lending accounts for nearly one-fourth of new loans granted in recent
months to small and medium-sized enterprises and about one-half of new mortgage loans.
Nonetheless, the anti-crisis support measures implemented by the Government and the Bank
of Russia will be gradually terminated. We also take into account that it is essential to maintain
accommodative monetary conditions next year in order to stabilise inflation close to 4% over
the forecast horizon.
When making our decisions on the key rate, we also estimate how saving behaviour is adjusting
to lower interest rates in the financial market. We are aware that in this case financial institutions,
companies and households need time to adjust to the new conditions. This is especially relevant
since the pandemic, declining incomes and higher uncertainty may dramatically alter
consumption and saving models.
Seeking higher returns, individuals are increasing demand for various instruments in the financial
market. For instance, we can already observe an increase in bond investments and an overall
surge in households' activity in the stock market. This trend in itself has no significant impact
on the efficiency of monetary policy because the transmission mechanism is equally functioning
through the securities market as well. We believe it essential that these changes in saving
models do not entail any significant rise in risks for households, businesses and financial
institutions. Hence, pursuing our monetary policy, we factor in that this adjustment will be taking
time.
As regards the economy, after the easing of the quarantine restrictions, economic
activity has been reviving, although unevenly across different industries and regions.
A number of industries are managing to decrease the gap with pre-pandemic output levels faster
than other sectors. This is evidenced by official statistics, our up-to-date results of financial flows
monitoring and companies' surveys held by the Bank of Russia's regional branches. Those
industries that are primarily focused on consumer demand are bouncing back more quickly.
Their recovery is being driven by both pent-up demand for goods that were unavailable over
the quarantine period and the growth of expenses in the domestic market during the holiday
period when possibilities to travel abroad are limited. Nonetheless, this is primarily related
to goods. The service sector is still far from having fully recovered, being affected by
postquarantine restrictions and consumers' cautiousness.
As regards the production of intermediate and export goods and their transportation, these
industries are recovering more slowly. Weak external demand is a significant constraint
on economic growth. Moreover, the momentum for the recovery in the global economy
may be waning now.
As a result of this heterogeneity, there may be significant differences in price dynamics
in different industries and regions, both now and in future. This trend is clearly demonstrated
by data on consumer inflation in summer.
The return to potential in different product markets may occur at a different pace. For instance,
in industries focused on domestic demand, this may be a faster process than in export
industries; the recovery of the consumer-facing sector may be quicker than in the production
of investment goods. Therefore, it is essential to consider not only the general output
gap in the economy, that is, the deviation of output from its potential, but also the situation
in individual sectors. If output in industries focused on domestic demand returns to its potential
faster than generally across the economy, this will amplify overall inflationary pressure. We take
this into account when analysing the economic situation and making key rate decisions.
At present, the effects of deferred domestic demand have been considerably implemented
and the overall recovery of the Russian economy is likely to continue at a more moderate pace.
This year, both fiscal and monetary policies are contributing to the economic recovery.
At the same time, while anti-crisis budget measures were particularly important during the period
of restrictions and will be curtailed in future, accommodative monetary policy will continue
to operate next year to support the Russian economy.
I would also like to emphasise that both fiscal and monetary policies play a countercyclical role,
that is, they address the issue of overcoming the downturn and bringing the economy back
to its potential. This is certainly a top-priority task in the current situation, yet it is critical
to remember what is absolutely essential for sustainable long-term development and an increase
in economic potential, labour productivity and, accordingly, households' incomes. To tackle this
task, we need incentives to increase private investments and develop private initiatives
and should enhance the flexibility of the labour market, which primarily depends on the business
climate and other structural factors.
The level of our economic potential after the pandemic and how quickly the economy will
regain it are crucial for both our macroeconomic forecast and monetary
As you know, this uncertainty of supply- and demand-side factors is a key point
policy.
in our forecast scenarios. They are presented in the draft Monetary Policy Guidelines for 2021-
2023 published last week. We are going to update our forecast estimates following the Board
of Directors' meeting scheduled for October. Yet, our approaches to the set of scenarios
and key forecast assumptions in the scenarios will remain unchanged.
Winding up, I would like to make my traditional comments on monetary policy
prospects. The main path of the monetary policy easing has already been passed - since June
2019, the key rate has decreased by 350 basis points, including by 200 basis points this year,
to reach its record low. We still see some room for reducing the key rate, but we will consider
the necessity to use this room and the time when this should be done.
As shown in the Monetary Policy Guidelines, both under the baseline and alternative scenarios,
the Bank of Russia will be capable to tackle the task of maintaining price stability, that is, keeping
inflation at our target close to 4%.