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Statement by Bank of Russia Governor Elvira Nabiullina in follow-up to Board of Directors meeting on 11 February 2022


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Good afternoon,

Today, we have made the decision to raise the key rate by 100 basis points to 9.50% per annum.

This decision is based on a significant revision of the economic situation and its prospects. Contrary to our expectations, inflation trends have not reversed by the moment. Moreover, the steady components of inflation have even strengthened. The main reason behind this is increasing imbalances in the economy. Accordingly, we will need a tighter monetary policy than we assumed previously. We expect annual inflation to return to the 4% target no earlier than in the middle of next year.

Making our decision, we considered the balance of risks for the economy and inflation, just as we usually do.

I will start out with the situation in the economy that has not only offset the slump of the pandemic period, but even notably exceeded a balanced growth path. We can see a stable rise in consumer and business activity. Russian companies’ net profit nearly doubled as compared to pre-pandemic readings. Unemployment dropped to a new record low. These are impressive results, but there is a catch — high inflation.

In the current conditions, it would be a mistake to believe that the observed economic growth is steady and balanced. High inflation is an indicator of an increasing overheating of the economy. If we take no measures to drive the economy back to a balanced growth path, its overheating will increase further and cause an uncontrollable acceleration of inflation and a subsequent slowdown of economic growth, or even a recession. High inflation erodes all the benefits of economic growth for households, threatening their real incomes and savings and thus worsening their living standards.

An overheating of the economy is a consequence of intensifying demand and supply gaps. A lot of people can observe a recent surge in prices for housing, cars and domestic tourism. These markets are the most vivid examples of possible consequences of soaring demand that exceeds the potential to ramp up supply.

A deficit of components and logistics bottlenecks have become a serious challenge for enterprises during the pandemic period. Companies are gradually settling these problems, but it will take at least a year to eliminate them completely.

Staff shortages are constraining output expansion increasingly more strongly. Unemployment has declined to its record low today, and companies will face difficulties hiring new employees to expand production. We consider this to be a more serious and longer-lasting challenge for a rise in supply than the persistent but still temporary logistics bottlenecks.

In these conditions, cheap lending will not help ramp up output quickly, but will only continue to spur demand. Monetary policy can and should play its countercyclical role. In order to protect households’ real incomes and savings against depreciation and create conditions for a healthier and steadier economic growth, we need to address overheated, excess demand. Excess demand is a surge in demand leading to rising prices, rather than higher consumption. This is exactly why we continue the cycle of key rate rises.

Given the monetary policy pursued, we forecast that GDP will grow by 2–3% this year. Its growth will equal 1.5–2.5% next year and return to 2–3% by the end of the forecast horizon, which we consider to be a steady rate.

As regards inflation, prices surged over the past year and exceeded our inflation target two times. In January, annual inflation sped up even more.

Temporary supply-side proinflationary factors have actually turned out to be longer-lasting. Global logistics bottlenecks have been hindering the imports of many goods for two years already. Prices for domestic tourism services continue to rise amid restrictions on foreign travel.

Transitory factors actually have the effect of steady ones, which has considerably affected households’ and businesses’ inflation expectations. In recent months, they reached the highest level recorded since early 2016.

There is even an opinion that the key rate increases do not contain price growth at all. However, if we had not started to raise the key rate last spring, inflation would have considerably exceeded 10% by the moment. Our key rate has prevented this, but the actual pressure of proinflationary factors has turned out to be stronger than we could have assumed.

Considering the stronger inflationary pressure and the revision of the potential duration of temporary factors, we have increased and expanded the range of forecast inflation to 5–6% this year. Given the measures we are taking, we expect annual inflation to return to 4% by the middle of 2023.

Speaking of monetary conditions, I can say that they are adjusting to the increased key rate more slowly than we expected. Due to higher inflation and inflation expectations, we have shifted from easy towards neutral conditions only now. Our today’s decision will contribute to the shift towards tight monetary conditions.

This will help limit the growth of long-term credit rates that significantly depend on inflation expected in the future and the inflation premium. The lower is the inflation rate included in these interest rates, the more affordable will be long-term loans.

Lending growth has stopped to accelerate, but this is still insufficient today to have a notable impact on inflation. Moreover, lending expansion is largely driven by loans issued at reduced rates under various subsidised programmes. Their terms are not very sensitive to monetary policy. On the contrary, the higher is inflation, the more attractive these programmes become for borrowers. The portion of such loans in the overall bank portfolio expanded at least two times over the past two years, now approximating 10%, according to our assessments. As the key rate has a weak impact on the demand for such loans, we need to maintain tighter conditions for all other borrowers who make the majority.

The key rate increase is influencing the trends in the deposit market slightly more actively than those in the credit market. Beginning from the middle of last year, households’ propensity to save has edged up somewhat. However, this process is still slow, which is mostly associated with the simultaneous rise in inflation expectations. Another reason is that deposit rates are growing diversely across the banking sector. Accordingly, to ensure the required rise in average deposit rates, we also need a more considerable increase in the key rate.

As regards risks, proinflationary ones prevail and have even become stronger.

Firstly, disruptions in production and logistics chains might remain for a longer period. During the pandemic, restrictions and structural shifts in production chains entailed a temporary, yet substantial rise in companies’ costs. This is the so-called shock of higher costs that will gradually diminish contributing to a slowdown of inflation. Our October forecast assumed that the impact of 40% of the transitory factors that had accumulated since the outbreak of the pandemic would abate in 2022. In our today’s forecast, we lowered this estimate to 20%. Moreover, there is a probability that this process will be slower or that it will not change notably. This is a major proinflationary risk.

Secondly, due to high inflation, many central banks are accelerating monetary policy tightening. Over the medium-term horizon, this will slow down inflation globally. However, in the short run, this might become a proinflationary factor for emerging markets. As regards external conditions, there is a probability of a further rise in prices for raw materials and energy commodities, as well as a range of other products, including food. Geopolitical risks have intensified as well.  In order to mitigate all these external risks, the Bank of Russia might need a stronger monetary policy response, all else equal.

Thirdly, another factor raising our concerns is the situation in the labour market, namely increasing staff shortages. Companies’ competition for labour resources will increase. This limits the pace and generally the potential of supply to quickly adjust to soaring demand. When labour costs rise, but labour productivity does not improve accordingly, this puts upward pressure on prices.

Disinflationary risks are weak over the forecast horizon.

I will now speak about our future decisions.

I would like to remind you that we forecast inflation to equal 5–6% this year and return to its target in the middle of next year. I would like to stress straight away that this does not mean that we are less committed to our target. Are we able to bring inflation back to 4% by the end of this year? The answer is no if we want to avoid a recession. For this, we would need a shock increase in the key rate, which would threaten both the sustainability of economic growth and, possibly, financial stability. Furthermore, this would decrease inflation below the target next year. A balanced decision is gradual disinflation that will return inflation to the target without creating any risks for steady economic growth.

According to our estimates, for monetary policy to be well-balanced, the range of the average key rate should be 9–11% p.a. this year, 7.5–9% p.a. next year, and 5–6% p.a. in 2024.

With this forecast, we cannot say for today that the cycle of key rate rises has completed. We hold open the prospect of further key rate increase at the upcoming meetings. We will closely monitor how quickly the steady components of inflation will slow down. Subsequent monetary policy normalisation will largely depend on the pace of a decline in inflation expectations and a weakening of supply-side proinflationary factors. We will take further steps considering the incoming information, but today we tend to believe that the reduction in the key rate will be slower and take a longer period than its rise over the past year.

Thank you for your attention.

This news item was originally published by the Central Bank of the Russian Federation (CBR RU). For more information, please see the Source Link.

Regulator Information

Abbreviation: CBR
Jurisdiction: Russian Federation

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