Moscow, 13 September 2024
Good afternoon,
Today, we have made the decision to raise the key rate to 19% per annum.
As a result of our earlier decisions, monetary conditions have continued to tighten in recent months. The expansion of lending has slowed down somewhat, primarily in the retail segment. However, inflationary pressures have not been easing. Underlying inflation is still higher than the rate needed for returning to the target next year. Today’s monetary policy decision will give a stronger impetus to a decline in inflation. We hold open the prospect of increasing the key rate further at our next meeting.
I would now dwell on the reasons behind our today’s decision.
Firstly, as regards inflation.
Price pressures remain high due to both underlying and volatile components. Most measures of underlying inflation are still in the range of 6.0–8.0%, which is intolerably high.
As to volatile components, the most significant pressure has been exerted by fruit and vegetables as their prices were falling this summer to a lesser extent than usual. Moreover, at the end of summer and in early September, some important visible items frequently purchased by households, in particular petrol and dairy products, were becoming increasingly more expensive. This might be fuelling inflation expectations even more.
Taking into account recent data, we expect that inflation is likely to exceed the July forecast of 6.5–7.0%. We will adjust this forecast at the core meeting in October.
Tight monetary conditions are facilitating the deceleration of inflation. As a result of our earlier decisions, the expansion of retail lending and the part of corporate credit that is less tied to government demand has slowed down. We are confident that inflation will be decelerating. However, as for now, the current monetary policy has not yet become sufficiently restrictive to bring inflation back to the target next year. What are we concerned about?
In the first place, our concerns are associated with inflation expectations as they have been rising among households for the fourth consecutive month. Businesses’ price expectations have increased as well, especially in retail. According to our survey, analysts have shifted the period of achieving the inflation target to 2026. This growth of inflation expectations makes it more difficult to give rise to a disinflation trend.
Our second concern is that the economic growth is unbalanced. In other words, the dynamics of demand does not correspond to the capabilities to expand the supply of goods and services. This is in particular what elevated inflation signals.
Hence, let us take a closer look at the economic situation, specifically what is limiting supply and spurring demand.
The labour market is still the main supply-side constraint hindering the increase in output. The unemployment rate has dropped to a new historical low again. According to surveys, the share of businesses suffering from staff shortages has remained high. Indeed, we can observe that the rise in wages has slowed down somewhat in recent months. However, it is still faster than the growth in labour productivity. The slower growth of wages does not mean that labour shortages have eased as companies’ staff costs have been rising, although in other forms. As reported by our regional divisions, enterprises have been hiring employees from other regions increasingly frequently, covering their expenses on accommodation and transport. Moreover, many businesses have been expanding their social packages.
Problems in logistics and cross-border settlements caused by sanctions have also been limiting the supply of goods and services in the domestic market. Moreover, amid the weak external demand, oil companies have reduced output pursuant to the OPEC+ agreement.
Now, I am going to speak of domestic demand. Although the increase in consumer and investment activity has slowed down, it remains high overall.
In September, the Present Situation Index of the Business Climate Index turned negative for the first time this year. This is one of the signs of a deceleration of economic activity. Nevertheless, it is worth noting that expectations expressed in the course of the survey suggest that companies remain very optimistic about the future. In other words, businesses might consider the current cooling of demand as temporary.
The key question is what caused a slowdown in economic growth: was it driven mainly by the cooling of demand or by supply shocks? If we find out that this was primarily driven by supply shocks, especially long-lasting ones, this will mean that monetary conditions should be tighter. We will need to further adjust demand to the limited capabilities to expand the supply of goods and services.
Since our previous meeting, monetary conditions have been tightening further.
The financial market has responded to the July revision of the key rate path. Yields on short-term federal government bonds have risen more than those on medium-term bonds, whereas yields on long-term bonds have declined. This suggests that market participants have lowered their long-term inflation expectations.
The credit market has also responded to our previous decision. The expansion of lending has slowed down most notably in the retail segment. Alongside the key rate, it has been influenced by other factors, in particular, by changes in the terms of subsidised mortgage programmes and the tightening of macroprudential policy. Corporate lending currently continues to expand fast. As a result, in July—August, the growth rate of the overall loan portfolio has not changed significantly.
The situation where the dynamics are uneven across the lending segments is normal. We do not expect the key rate to have the same effect on all market segments. It is important that in order to reduce inflation, the growth rate of overall lending should be more moderate.
Now, I would like to speak of external conditions.
The expansion of the world economy has been slowing down, which is generally in line with our forecast. This process is especially evident in the industrial sector, while the services sector demonstrates better dynamics. Overall, the structure of global demand is becoming less energy-intensive, which might restrain the demand for Russian export goods.
The current decline in crude prices is related to both the structure of the global economic growth and expectations of its further slowdown. These trends in the oil market are proinflationary for Russia.
Lower prices for the main Russian export goods have entailed a slight contraction of exports in July and August. Concurrently, imports have remained at the same level, therefore, the balance of foreign trade has shrunk. Importers are still experiencing problems with cross-border settlements. Alongside the key rate, these difficulties might be limiting the growth rate of imports amid high domestic demand.
I would now dwell on the risks to the baseline forecast.
The main internal risk is the full utilisation of available production capacities and labour force. In this situation, any further stimulation of demand will only be causing price increases without growth in output.
Moreover, there are still risks associated with inflation expectations that might get entrenched at a high level for a long period.
Finally, another proinflationary risk is a possible rise in geopolitical pressure and a more notable deceleration in major economies. This might entail a decline in the demand for commodities, which will in turn exert pressure on Russian exports and, consequently, on the ruble exchange rate.
An essential factor in our decision-making is fiscal policy. Changes in the structure and amount of budget revenues and expenditures, the budget deficit, and the pace of fiscal policy normalisation have a strong influence on demand and, accordingly, our decisions. We will take into account the three-year budget configuration when updating our forecast in October.
There are also disinflationary factors that might materialise over the forecast horizon. In the first place, this is a faster reduction in demand and a more considerable increase in the economy’s potential and labour productivity.
Winding up, I would like to comment on the future path of the key rate.
We consider it necessary to return inflation to 4% next year. To ensure this, we are ready to maintain tight monetary conditions for as long as needed. We are also ready to raise the key rate further.
Why is it critical to return to 4% instead of putting up with 6–8%? First and foremost, this is essential to guarantee the protection of households’ savings and incomes against depreciation. The second reason is that long-term loans are affordable only when inflation is low. When inflation is high, such loans, including mortgages, are expensive for most borrowers as their cost includes the inflation component. Third, when inflation is notably higher than in trading partner countries, the ruble is constantly weakening. Fourth, high inflation makes prices more volatile. The higher inflation is, the more difficult it is to control it. If we put up with the price growth rates of 6.0–8.0%, the risks of moving to double-digit inflation will soar. In this case, regaining control over inflation would become much more difficult and expensive for society. Hence, the Bank of Russia will be doing its best to reduce inflation to 4% next year.
Thank you for your attention.
Source – Bank of Russia