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Bank of Russia Governor Elvira Nabiullina’s speech at the State Duma plenary meeting

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Good afternoon, dear colleagues,

Consistent with tradition, I am here to present the Monetary Policy Guidelines for the three years ahead.

The Guidelines have by now passed several cycles of discussion in the Duma’s working group and its dedicated committees. I would like to thank deputies for the feedback we received and took into account in the finalised document we are reviewing today. Let me begin with the decisions we made this year and their impact on the economy. I will then proceed to say a few words about our outlook.

This year, we have been struggling with an unprecedented pandemic, as has been the whole world. Restrictive measures and a temporary suspension of business operations resulted in decreasing revenues and incomes, disrupted supply chains, and a fall in the prices of Russian exports. This is a period of uncertainty, including uncertainty as to how long a full exit from restrictions will take and how much of an impact the long-term fallout will be for consumer behaviour and the economic structure.

These are the conditions where the Bank of Russia is conducting a policy that aims to limit the fallout from the pandemic for our consumers and businesses.

On the key rate, we have revised it downwards several times, which resulted in a two percentage point drop since the year start. We switched to a soft monetary policy stance. This policy improves availability of credit, shoring up demand in the economy, both for consumers and investors. This, in turn, works to accelerate a return of inflation to target, and helps us stabilise it close to 4%.

Our policy decisions were more decisive in steadier periods, while in less stable times in financial markets, we paused.

Certainly, our decisions are based on current developments. Yet, they are above all driven by the economic outlook. As uncertainty grew, a lot of wide-ranging options emerged as to how the situation may play out. This is why there are four scenarios in our Guidelines: a baseline (which we view as the most probable one), disinflationary, pro-inflationary and risk scenarios.

This year’s forecast is also different from previous years’ in terms of its assumptions based on the oil benchmark. We came to the conclusion last year, in the course of a discussion with deputies, that oil should no longer play first fiddle in the scenarios given the reduced reliance of the economy on oil prices.

This year’s scenarios vary in terms of change in supply- and demand-side factors and potential growth drivers.

Under the baseline scenario, a global economic recovery is projected to be slow. We expect Russia’s economy to grow 3–4% next year, 2.5–3.5% in 2022 and 2–3% in 2023.

The economy is expected to return to pre-crisis levels by mid-2022. A recovery in consumer and investment demand is set to gain support from the Government and Bank of Russia’s anti-crisis package, together with soft monetary policy. Under the forecast, monetary policy is set to remain soft throughout 2021; however, should disinflationary pressures of the pandemic persist or strengthen, our policy will remain soft longer than we currently assume.

The monetary policy decisions we have made to date will continue to support an economic recovery this year and into 2021. To recap, monetary policy decisions have a lag of 2–6 quarters before influencing price changes: that is, the decisions we have made will not manifest themselves fully until next year. These decisions will ensure a soft monetary policy stance as the effect of the Bank of Russia’s and the Government’s anti-crisis measures fades out.

This year, we have seen a substantial drop in lending rates and an acceleration in lending. In the first ten months of the year, corporate lending expanded 8.7% (double last year’s figure), retail lending grew 12%, including 14% growth in mortgage lending (based on data for the first nine months).

We have to admit though that for many businesses, borrowings are rather an opportunity to keep afloat than to expand operations. This is true of individuals who borrowed to sustain their consumption standards, when they had to deal with a drop in incomes in the second quarter. We therefore have in mind that current lending data include this component of short-lived growth in demand for credit as the drive to level out the consequences of the downfall. As corporate revenues and consumer incomes recover, there will be no need for this component, resulting in the subsequent emergence of an alignment between lending growth paces and the paces of economic and income growth.

The downward movement of interest rates we have seen recently as a result of lower inflation, further strengthened by the transition to soft monetary policy, works to make credit to households and business more affordable. Lending expansion does not involve a dangerous rise in the debt burden.

We joined efforts with the Government in rolling out a wide economic support package in the second quarter, intended to help the economy pass the tight restrictions phase.

Banks enjoyed a regulatory easing from the Central Bank — which was designed to spur loan restructuring and the issue of new loans, and to ensure credit processes retain dynamism.

This resulted in the banking system having supported the economy through loan restructuring, including statutory repayment holidays and banks’ proprietary restructuring programmes. Individuals had 820 billion rubles of loans restructured; loans of almost 819 billion rubles were restructured for SMEs, and more than 5 trillion rubles, for major companies. Of note, statutory restructurings under the repayment holiday law totalled over 15% of all restructurings, with 85% made up by banks’ proprietary programmes. Indeed, banks accommodated borrowers’ needs, and are still doing so. Banks entered this crisis in good shape and were able to take on this burden.

Most of our measures remained in place until late September. Yet, we rolled over those supporting lending growth. We also extended our regulatory easing decisions alleviating pressure on bank capital.

Mortgage lending deserves special mention. We have a concessional lending programme in place, which certainly helped, on the one hand, households keep the opportunity to improve their living conditions, and on the other hand, developers carry on commissioning new builds. Having said this, we are now seeing an increase in housing prices in the primary market, ahead of both inflation and households’ income growth. This may well result in poorer availability of housing — despite the concessional rate. A well-timed rollback of this anti-crisis programme would help us stave off the emergence of ‘bubbles’, balancing supply and demand in the housing market. Market-based (in addition to subsidised) mortgage lending rates also dropped, and moving forward, this is set to help consumers make use of accessible mortgage loans. Rising housing prices and the associated debt burden should be aligned to movements in household incomes.

To conclude my points on lending and the banking system, let me mention that banks’ reserves previously accumulated, the so-called capital buffers, inspire confidence that the banking system is on course to get through this period retaining full resilience. Having in part taken the brunt of the damage inflicted by coronavirus, banks are projected to bear it without causing problems for depositors or creditors. The banking system’s stability is valuable as never before — this is the condition we have brought about thanks to many years’ efforts, including the initiatives to improve regulation and cleanse the banking sector of ‘bad’ players.

In an effort to reduce the pandemic fallout for the economy, we are taking action beyond our monetary policy measures and banking regulation.

For example, bank charges and transactions costs are sensitive issues for consumers and businesses. At the peak of the pandemic, decisions were made to limit the amounts of acquiring fees on socially important payments and Faster Payments System fees (and here we are truly thankful to our lawmakers, who made this possible). Importantly, we view these steps, among others, as temporary solutions. Market development, as much as price formation, should be driven by competition and the struggle for customers. Historically, our financial system is known for its large share of major players; this is why the Bank of Russia is working to create an infrastructure that would enable smaller banks to compete with major ones. For instance, this is the Faster Payments System: it is already transforming the C2C market; banks will now be obliged to handle QR-code payments, that is, customer payments for products and services. This instrument constitutes an alternative to the traditional acquiring and competition for the method of payment, and this will in particular carry major implications for the level of fees.

Another area of focus is a digital ruble. We submitted the consultation paper on a digital ruble in October. Once our consultations with the expert community, the financial sector and companies are over, we will be ready to make a decision on the issue of a digital ruble. I would like to take this opportunity and ask the State Duma to endorse that subsequent digital ruble discussions take place on the State Duma platform. The law-making body’s opinion and support are of crucial importance in this matter.

A digital ruble suggests less costly transactions for both customers and businesses. This is a form of money better adjusted to the needs of a digital economy, smart contacts and the possibility of ensuring transparency of payments for the state, in critical instances, for instance, in social payments and government contracts. As a separate objective, we are exploring the option of digital rubles for offline payments, which would see consumers using digital rubles even without internet access. This would make another competitive edge for a player in the financial market and incentivise banks to make more advantageous offerings to customers.

In the not so distant future will there be market players capable of servicing each and every need of an individual: from a bank account to insurance and streaming services, telemedicine and food delivery. The pandemic accelerated digitalisation and rapid growth of these ecosystems that evolve from financial players such as banks, while those of a non-financial nature make every effort to provide financial services. In such cases, we have to address a number of issues. These include situations when consumers are no longer aware of which provider they are dealing with — a bank or a supermarket — and which of the two guarantees the safeguard of their assets, or cases of investors failing to assess the risks arising in various ecosystem segments.

We should also address issues of the need for uninterrupted operations and personal data protection. Business risks may emerge for banks themselves and their creditors, especially as investment grows. The investment risk is a major one: this is the case when a start-up ‘won’t fly’, causing the bank at the top of the ecosysytem to lose money or subsidise the start-up at the expense of profit margins in its core business. In this case, the forced support risk — when the bank may provide emergency support — matters, too.

What does this mean? It means that we, the regulator, should always keep our finger on the pulse to maintain financial stability and uninterrupted development of services, to detect and limit the related risks in time. We suggest that standards for disclosure of information on ecosystem investment should become part of bank statements so that the regulator, investors, creditors and rating agencies can make an appropriate estimate of them, and so that regulation also extends to these new operations of banks. We are drafting the required amendments, and when doing so, we are guided by the principle of proportionality, aiming to ensure that there are more market players and that consumers enjoy fair competition.

Another point I would like to expand on is the flow of individuals’ funds to the stock market. Deposit rates are still above inflation, ensuring the safeguard of assets and high reliability. Yet, the downward movement of deposit rates is driving many people to try their luck in the stock market — not only to keep, but also to boost savings through the higher rates of return available.

Admittedly, the entry of our citizens, so-called retail investors, to the stock market is no short-lived effect of changing economic conditions. This is a major trend, and it is here to stay.

We realise that should people lose trust in stock market instruments, it would be irrelevant how user-friendly a broker’s or a bank’s mobile application was, or the difference between a deposit yield and return on investment. Our opinion is, under no circumstances should this risk be undervalued.

We have passed a law on protection of non-qualified investors, but it will not become effective until 2022. Tests for those willing to buy rather complicated / structured investment tools will not be available until April 2022.

This is not to say, however, that we should let retail investments run themselves next year given their rapid growth.

Were people to invest money in products with too high risks and which people cannot understand, and were people to fail to receive the rates of return they expect, they would simply exit the stock market, never coming back. Trust would be lost. We have the bitter experience of investment life insurance (as a reminder, at its peak in 2018, its annual growth was 39%, which gave way to a 32% drop as early as 2019).

What are our plans for the immediate future? First of all, we have agreed with self-regulatory organisations (SROs) that the tests approved under basic standards would come into use before the original date of 22 April, that is, in the third quarter of 2021 — half a year before they become mandatory by law. Also, and it is very important, we have begun the rollout of the so-called instrument specifications (‘passports’), otherwise referred to as key information documents. These are short and clear-cut documents describing key product properties such as risks, the total cost, return, etc. At the present time, two largest SROs of professional financial market participants are working to develop standards for passports on structured investment products. Their implementation is due to start early next year.

And yet, as you know, there is no self-regulation in our banking system. We discussed the matter with bank associations and have confirmation that banks are unprepared for the setup of such a SRO. However, most investment products sell through banks, which act as agents. Hence our view that financial product sale rules for banks should be formalised in legislation. The SRO-developed standards for ‘product passports’ should only be superseded by a statutory Bank of Russia requirement. The related draft law, currently being elaborated with active involvement of the Bank of Russia, is planned for this session. We look to your support in this effort, so that we can ensure protection is in place for the rights of our citizens becoming active players in the stock market.

In conclusion, let me thank you once again, deputies, for your interaction with the Bank of Russia on monetary policy matters and matters related to financial regulation development. This year has proved challenging for legislators, requiring maximum efficiency in decision-making and legislation. It is thanks to your efforts that we were able to conduct a policy in the financial market that helped ease pandemic pressures.

Our monetary policy will continue to be consistent with our mandate enshrined in the Constitution and the central bank law; it will ensure price and financial stability. These two principles constitute a prerequisite for the economy to return to sustainable growth.

Thank you for your time. I am ready to take your questions now.

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Regulator Information

Abbreviation: CBR
Jurisdiction: Russian Federation

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