TEXT-Statement by Elvira Nabiullina, Head of CBR, after the meeting of the Board of Directors

MOSCOW, March 17 (Reuters) – At its Friday meeting, Russia’s Central Bank decided to keep its key rate at 7.50%, where it has been since September 2022, as the alignment of pro-inflationary risks has changed little from the previous meeting.

Below is the text of the statement of the president of CBR Elvira Nabiullina after the meeting of the Board of Directors:

“Good morning! Today we have decided to keep the key interest rate at 7.50% pa. Economic activity continues to pick up. Inflation dynamics remain subdued. Inflation expectations of the population have lowered significantly, but remain elevated. External conditions have deteriorated slightly. Overall risks are still shifted towards pro-inflationary. Therefore, we still believe that the probability of a rate hike this year is higher than the probability of a cut. Let me tell you more about the logic of our solution. One. The price increase remains moderate. Compared to the end of last year, the average monthly price growth rate is The acceleration in price growth in January and the subsequent slowdown in February were largely determined by one-off factors, which was particularly visible in the prices of electronics, building materials, furniture and certain foodstuffs. speed of growth permanent components of inflation remains moderate. Against this background, the dynamics of service prices stands out – since June last year they have been growing noticeably faster than the prices of goods. The accelerated increase in the prices of services is often interpreted as a sign of growing persistent inflationary pressure in the economy, which requires a monetary policy response. This is due to the fact that these prices are less responsive to exchange rate dynamics and one-off factors in individual markets, and are less frequently verified than commodity prices. At the moment, however, it is premature to draw an unequivocal conclusion that the rapid increase in the prices of services means persistent inflationary pressure. The current increase in service prices consists of two elements. The first is the really stable part. This is related to the dynamics of wages, as the main part of the costs of services are the costs of labor resources. But the second element is the increase in catching up. Since the middle of last year, we have been observing a correction in the prices of services after the pandemic and after a sharp increase in the price of goods in the spring of last year. To what extent the current increase in the prices of services results from both components is still difficult to assess. However, over time, the adjustment process will come to an end and the growth rate of service prices will be determined to a greater extent by permanent factors. We will carefully analyze the data received in this regard. Inflation expectations of the population decreased significantly in March. Respondents notice a slowdown in inflation, as well as an improvement in expectations regarding the economic situation in the country and the prospects for their own financial situation. Generally, however, the level of inflation expectations of both households and enterprises remains elevated. Second. The increase in economic activity continues. The actual GDP dynamics in 2022 turned out to be more positive than our estimates. Government demand was an important factor supporting economic activity last year. At the beginning of this year, according to operational indicators, including the Bank of Russia business climate index, business activity continued to grow. A noticeable improvement can be observed in some sectors of the processing industry, construction, transport and trade. Business is still adapting to new conditions. Of course, some difficulties remain with the supply of equipment and components. But in general, according to our regional branches, many enterprises were able to switch to analogues or establish parallel imports of capital goods. Domestic demand-oriented production is developing. For example, automakers in several regions simultaneously load production capacity after a break. Textile manufacturers in the Central Federal District are launching their own clothing brands, filling vacated niches. Paper producers in the Northwest District were able to redirect supplies from the external market to the domestic market and expand their product range. You can read more about the adaptation of industries in the March issue of our report “Economy of Regions”. The lifting of infrastructural and logistic restrictions continues – new warehouse complexes, terminals and transport routes are being built. These projects are supported by public investment. The recovery in economic activity is also reflected in the labor market. Real wages continue to rise in many industries, with historically low unemployment rates. Underemployment continues to decline and the demand for workers in many occupations is increasing. Consumer activity remains limited. We expect its gradual expansion. Three factors contribute to this. Firstly, a decrease in motivation to save money. So far, people are still driven by the precautionary theme that emerged from the growing uncertainty last year. They still create an air cushion that allows them to feel more confident. As overall uncertainty decreases and a certain comfortable level of savings is reached, the incentive to accumulate additional cash may decrease. Secondly, wage and income growth will stimulate the expansion of consumer demand. Third, people will eventually get used to the new range. Gradually, it is rebuilding, new brands appear to replace those that have left. But consumers are in no rush to switch to them. A characteristic detail is the increase in demand for equipment and clothing repair services. That is, probably people prefer not to buy a new one, as they often did before, but try to extend the life of what they are used to. Nevertheless, sooner or later there will be a need to update equipment and other things. We expect external demand to be increasingly replaced by internal demand, not only through the public sector, but also through a revival of consumer activity. At the same time, we will assess how the expansion of demand will be correlated with the possibilities of increasing the production of goods and services. Third. Monetary conditions. Monetary conditions remain broadly unchanged and remain neutral. Since the February meeting, OFZ yields and interest rates on loans and deposits have changed slightly. Credits to the economy are growing. In the enterprise sector, the dynamics of lending remains high. A certain decrease at the beginning of the year resulted from large advances in budget expenditures. They partially replaced the needs of companies in the stock of short-term loans. The pace of lending to retail customers is moderate. At the same time, the dynamics of individual components is not uniform. Thus, the high growth rate is maintained in the mortgage loan segment. In consumer loans, they are lower – in many respects this reflects the prudent behavior of borrowers and lenders, as well as the effect of the macro-prudential measures introduced. While bank credit remains the main source of money supply growth, the budget plays an increasingly important role. At the same time, the faster growth of the ruble money supply is associated with an increase in the demand for money and a change in its structure. The extension of payment chains and rising prices increase the demand for working capital. Replacing foreign debt with loans to Russian companies also generates additional demand for money. Thus, although the growth rate of the ruble’s money supply is high by historical standards, it is still broadly consistent with the neutrality of monetary conditions. Let’s move on to the external conditions. They have deteriorated somewhat since the February meeting. Thus, new restrictions on our foreign trade began to apply. But on the other hand, bottlenecks in the transport infrastructure are being removed, new routes for the supply of export and import goods are being created. The physical volume of imports, which increased markedly in the second half of last year, remains relatively stable. At the same time, difficulties with the sale of export goods persist, physical volumes remain below the levels of both 2021 and last year. The lifting of anti-epidemic restrictions in China will have a positive impact on the global economy. For the Russian economy, this may mean the intensification of mutual trade, the emergence of new export and import opportunities. The tourism industry could get an extra boost. Assessing the external conditions, I cannot fail to comment on the current situation in the US and European banking systems. It has no direct impact on the Russian financial system. But this new factor in itself adds to uncertainty about the future trajectory of the global economy. The current situation exacerbates the problem of balancing monetary policy goals and threats to the financial stability of Western central banks. On the one hand, we see the vulnerability of the financial sector to interest rate and other risks, on the other hand, the current inflationary pressure remains elevated. Together, this situation could increase the risk of recession in the global economy, despite the strong data we have seen recently. For Russia, the slowdown in the global economy means a fall in demand for our exports, which may cause additional inflationary pressure. Now about the main risks to inflation. Our assessment of the balance of pro-inflationary and disinflationary risks has not changed significantly. All the factors we recorded in February remain. First, the trajectory of budget spending. We treat the increase that occurred at the beginning of the year as an interim redistribution. In the current situation, budget spending will compensate for the decline in private sector demand. In the future, we will consider a deviation from the announced trajectory of budgetary policy normalization as a pro-inflationary factor. Secondly, the labor market. Staff shortages may worsen. To some extent, labor needs can be met by migration flows. However, even in this case, the risk of labor productivity growth slowing down relative to real wage growth remains significant. Third, the dynamics of consumer demand. The transition from austerity to consumerism may be faster and more abrupt than we expect. In this case, it is possible that even with the debottlenecking we are seeing, the increase in demand will outstrip the expansion in supply. Finally, it is possible to further tighten sanctions limits. A fall in demand for export goods may lead to a weakening of the ruble, which will later be reflected in prices. Complicated logistics, trade settlements or other restrictions may also lead to higher prices of imported goods and limit the possibility of increasing supply. And about our future decisions. Inflation is broadly in line with our forecast of 5-7% for this year and economic activity is slightly better. The range of the average key rate for this year is 7.0-9.0% pa, we expect to return to the neutral range in 2025. Traditionally, we update the calculation of the neutral rate in July as part of the preparation of the Monetary Policy Guidelines. But at the same time, we can already say that three factors will significantly affect this. First, fiscal policy – in particular the level of structural budget deficit. Second, the risk premium for our economy. And third, the level of foreign risk-free interest rates. These factors are likely to increase our estimate of the neutral rate. However, we will evaluate their concrete contribution before the July meeting. We will make further decisions regarding the rate taking into account the need for inflation to return to the target in 2024 and stabilize around 4% in the future. Thank you for your attention!” (Moscow office)


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