Good afternoon,
Today, we have made the decision to raise the key rate to 15% per annum.
Monetary policy tightening is already being translated into the economy. This is evident from higher interest rates on savings and a slight slowdown in lending. However, the steady expansion of demand has been increasingly surpassing the potential to ramp up the supply of products and services. Consequently, prices are rising faster than expected. Fiscal policy easing is another proinflationary factor over the forecast horizon. Therefore, it is essential to tighten monetary policy even more. Our policy will support a more balanced growth rate of credit that would be in line with the objective of returning inflation to the target of close to 4% next year.
I would now dwell on the reasons behind our today’s decision.
Firstly, as regards inflation.
Price growth rates are high. The inflation acceleration in September significantly exceeded our estimates. Strong pressure on prices persists in October as well. Even leaving aside one-off factors, the current increase in prices is at least two times faster than target inflation. All indicators of persistent pressure on prices exceed the target.
A matter of concern is companies’ price expectations. They are now close to multi-year highs. Households slightly lowered their inflation expectations in October, but they are still high. Analysts’ inflation forecast for the next year exceeds the target, which is obvious from the findings of our macro survey. High inflation expectations in the economy are also a sign of insufficiently tight monetary conditions that have formed by this point in time.
Although our decisions are already being translated into the economy, current inflation is still largely impacted by earlier lower interest rates offered in the first half of 2023. I would like to remind you that we had been maintaining the key rate at 7.5% per annum for ten months until July. Alongside expansionary fiscal policy, this helped return the economy to the pre-crisis level within quite a short period. However, the further significant acceleration of inflation signalled that monetary conditions in the economy were actually accommodative. Therefore, in the middle of the year, we began to raise the key rate. However, because of the long time lags, the effects of accommodative monetary policy are still passing through to prices even now. Similarly, the effects of monetary tightening will fully translate into the economy several quarters later.
We have updated our inflation forecast for both 2023 and 2024. The revised forecast takes into account the actual rise in prices, as well as the effect of higher government expenditures in the new budget. This year, prices will go up by 7.0–7.5%. Next year, influenced by monetary policy, inflation will slow down to the target, approximating 4.0–4.5%, and later on stabilise at a level of close to 4%.
Secondly, the economy.
According to our estimates and recent data on economic activity, GDP growth in the third quarter was higher than expected. The main driver was investment demand that was largely supported by budget expenditures. Besides, the fiscal stimulus is focused on manufacturing sectors demonstrating maximum growth rates.
Due to high domestic demand, companies were able to pass through their rising costs to consumer prices. Accordingly, businesses’ profits are close to the record highs of 2021.
The increase in companies’ equity along with budget expenditures and lending growth enabled businesses to ramp up their investment plans. According to the monitoring of businesses, over recent months, companies have become even more optimistic in their estimates of future investment in the expansion of their production facilities, although interest rates on loans have risen. However, the staff deficit is considerably dragging down the expansion of production. Two-thirds of respondents are now facing this problem that is especially acute in the manufacturing sector. To retain or hire personnel, businesses are raising wages, which is inevitably followed by price increases needed to cover costs for higher wages. As long as increasing demand cannot be covered by ramping up output immediately, its growth does not result in higher consumption, but only pushes prices higher up. To prevent inflation from spiralling out of control, we need to maintain higher interest rates in the economy.
Considering the actual GDP dynamics over the second quarter and the recent data for the third quarter, we have raised the forecast growth rate of the economy for this year to 2.2–2.7%. The GDP forecast for next years remains the same.
I would now speak on how monetary conditions have been changing following our earlier decisions.
Deposit rates have been adjusting most quickly. The growth of interest rates makes it possible to offset losses caused by high inflation. As a result, households’ demand for deposits has increased. People are not only transferring their funds from current accounts to time deposits, but also returning the previously withdrawn cash to banks.
The pace of adjustment in the credit market varies across segments. According to recent data, unsecured consumer lending is now demonstrating signs of growth slowdown. Mortgages continue to increase fast, but this segment is affected by subsidised programmes that are not sensitive to key rate changes. The portion of the mortgage portfolio formed at market rates is already responding to the monetary policy tightening.
As regards corporate lending, the annual growth of the portfolio reached 21.5% as of the beginning of October. Corporate lending is expanding despite higher interest rates. This is because companies have high price expectations and, therefore, do not consider current lending conditions as tight. In other words, many businesses could raise loans expecting that a further acceleration of inflation will depreciate their debt. Another driver behind corporate lending is the fact that some companies are ready to raise short-term loans at higher interest rates, expecting payments under state contracts at the end of the year. More details about monetary conditions are available in our October Regional Economy report.
Our today’s decision on the key rate will increase money market rates. Accordingly, interest rates on short-term loans will be higher than those on long-term loans, which will intensify the disinflationary effect from our policy.
I would briefly talk of the budget. Fiscal policy will be much more expansionary than we assumed in our September forecast. A stronger fiscal stimulus reduces room for an increase in private lending. Considering this fact, we have lowered the forecast growth rate of lending to the economy for the next year by two percentage points to 5.0–10.0%. As long as fiscal policy will be generally more expansionary over the next years than expected, we have raised our estimate of the neutral key rate to 6.0–7.0%. In other words, all else being equal, we need a higher key rate to be able to ensure price stability.
Now, I would like to speak of external conditions.
The growth of the world economy continues to slow down gradually. Moreover, the situation in the Middle East is an important factor of uncertainty, including as regards possible changes in energy commodity prices. Our updated forecast assumes slightly higher oil prices. By the way, I would like to note that we have started publishing forecast prices for Brent instead of Urals. We will thus be able to better present our view of the balance in the global oil market and compare our forecast with the price used for taxation purposes.
The reversal of the dynamics of the balance of trade and the key rate increase from mid-August have had a stabilising effect on the ruble exchange rate. Nevertheless, the fluctuations observed during this time were largely associated with taxation periods and a number of large corporate transactions. As to the contribution of the requirement to sell foreign currency revenues, we will be able to assess it after receiving comprehensive data. However, we believe that such restrictions can only be efficient over a short period, slightly accelerating the effect of fundamental factors. Further on, the exchange rate will be influenced my monetary policy tightening that is cooling down aggregate demand, including the demand for imports in ruble terms. Another factor that will be impacting the exchange rate will be the movements of export prices and quantities and the dynamics of the balance of trade related to them.
In our updated forecast of the balance of payments, we have raised the estimate of exports due to a higher forecast price for oil. The forecast of imports has been lowered as import quantities are expected to stabilise and respond to the key rate increase. Overall, the surplus of foreign trade is expected to be slightly larger than assumed in the September forecast.
I will now speak of possible risks.
As before, the ratio of risks is significantly shifted towards proinflationary ones. The most important of them are still elevated inflation expectations of businesses and households, faster lending growth, more acute staff shortages, and more expansionary fiscal policy. A possible slowdown of the world economy that might affect the exchange rate remains on the list of risks. Disinflationary risks are weaker. They include an additional rise in prices for Russian exports and a faster cooling-down in the credit market.
Winding up, I would like to comment on monetary policy prospects.
The Bank of Russia possesses a set of efficient tools to reduce inflation to the target. We were raising the key rate sufficiently fast at our recent meetings and will be ready to do this again if there are no signs of a steady deceleration of inflation and a decrease in inflation expectations. Inflation has been persistently deviating from the 4% target beginning from 2021. Such a long-lasting deviation might unanchor inflation expectations and confuse economic agents. Our experience shows that the period of higher interest rates in such conditions should be longer.
This is what makes the difference between the current situation and the two other cases of significant key rate increases in 2014 and 2022. Then, in addition to faster inflation, we also observed material risks to financial stability largely induced by external factors. We had to address these risks by changing the key rate. After mitigating these risks, we were changing the key rate focusing on the objective to slow down inflation. I would like to emphasise that disinflationary processes in 2016–2017 were supported by contractionary fiscal policy.
The current situation is totally different now. We are facing inflation caused by the internal imbalance between demand and supply. Demand is expanding, whereas the increase in supply is hindered by restrictions. Consequently, price growth is accelerating. Moreover, fiscal policy will remain expansionary during the next three years. This means that monetary policy should be tighter to ensure the return of inflation to 4%.
In our updated forecast, we have raised the path of the key rate. The average key rate will equal 15.0–15.2% per annum over November—December 2023 and 12.5–14.5% per annum next year. This key rate path will help return inflation to the target by the end of the next year and stabilise it at the level of 4% in the future.
Thank you for attention.
