Elvira Nabiullina: Recent Russian economic developments and Bank of Russia’s forecast Statement by Ms Elvira Nabiullina, Governor of the Bank of Russia, in follow-up of Board of Directors meeting, Moscow, 13 March 2015. *  *  *  Good afternoon! Today the Bank of Russia Board of Directors decided to reduce the key rate from 15.00% to 14% per annum. This decision takes into account the following main factors. First, the latest data on the economic situation show that the balance of risks remains shifted towards the weakening of the economy rather than acceleration of inflation. January data and February leading indicators, primarily business sentiment indices, indicate that the economic situation continues to deteriorate and this trend may persist until 2016 Q1. Seasonally adjusted unemployment fell to 5.0%. It should be taken into consideration that the Russian labour market traditionally adjusts, at least at the first stage, through wage rates and part-time employment, whose dynamics is indicative of lower demand for labour. At the same time, shrinkage of consumer demand will have a downward pressure on inflation. Second, monthly inflation slowed down considerably in February following the surge in late December-January. And weekly March data indicate that this process continues. The current high level of annual price growth is explained by the supply-side factors – decline in the ruble exchange rate and imposed trade restrictions. These are one-time factors, and in case there are no new considerable shocks their impact on monthly and quarterly inflation will decrease over the next months.

Overly stringent regulation normally leads to more expensive financial services, which affects resource utilisation. The stringent regulation of financial markets in the 1960s and 1970s gave us a relatively stable financial system, but at the expense of efficiency. On the other hand, deregulation brought about developments on financial markets which created a “seemingly efficient” system, but which gave rise to major risks to stability. The development over recent years has shown just how closely interlinked the tasks of the central banks are. For example, the emergence of a situation of financial instability also has  BIS central bankers’ speeches  1  repercussions for both inflation and resource utilisation. This illustrates that it is not possible to conduct monetary policy and financial stability policy completely separately. Differences in time horizons give rise to trade-offs We can also describe the central banks’ conflicting objectives in terms of different time horizons. For monetary policy, the time horizon is usually two to three years, which is reasonable in light of how the business cycle usually varies. However, we know from experience that financial imbalances and risks in the financial system are built up over a much longer period of time, which can include several business cycles. These longer periods are usually described in terms of so-called financial cycles. There is no established method of measuring the financial cycle, but lending rates, credit terms and asset prices are common indicators.1 So, the financial cycle has its up- and downturns just like the regular business cycle, but is often more protracted.