The statement of the Chairman of the Bank of Russia Elvira Nabiullina at the meeting of the Board of Directors June 19, 2020
Today the Board of Directors decided to reduce the key rate by 100 basis points, to 4.50% per annum.
One percentage point is much more than the steps that we did in the last few years. Although this decision was widely expected and analysts and the financial market, I consider it useful to explain why the current situation requires such a move.
Radical change in the economic situation in April pointed out that the disinflationary factors prevail in the medium term. Under these conditions, was the necessary transition to a soft monetary policy. And then we made the decision to cut the rate by 0.5 percentage points.
What happened a month and a half since the previous rate decision? And any reason to reduce the rate by 1 percentage point now?
First, the situation in the economy develops so that the disinflationary effect will be even stronger than we expected in April. Restrictive measures are in force longer and are removed gradually. Plus, the maximum reduction of oil production within the OPEC transaction+ extended for July that will increase both direct and secondary effects. That is, the drop in demand in the second quarter is likely to be somewhat deeper, and the recovery somewhat more extended in time than we thought a month and a half ago.
Secondly, the effect of short-term proinflationary factors that we considered when making the decision in April, exhausted. Monthly inflation in may slowed down significantly compared to April, and the current rise in prices with the exception of seasonality in terms of the year now near or even below 4%. Inflation expectations declined after a temporary growth in March-April.
Thirdly, monetary conditions in may and June began to soften after tightening in March and April- this is evident by the financial market indicators and surveys of enterprises. This is facilitated by the program of state support of borrowers as victims of the pandemic, businesses and the public. But it requires significant further easing of monetary conditions, given the scale of disinflationary trends.
Fourth, significantly decreased risks for financial stability. The situation on the markets calmed down, significantly reduced volatility, reduced risk premium, oil prices returned to the level of 40 dollars per barrel.
Thus, the events of the last six weeks fully confirmed that there is room for a substantial reduction of the key rate. And we use it. At the next meeting we will assess whether you would benefit from a further reduction of the key rate.
Now — about what it depends on and what our expectations are.
On the operational indicators we are now seeing the signs of partial recovery in economic activity. This is due to the gradual easing of restrictive measures in most regions. But it will take time to restore production and supply chain. In the past, the company could change investment and production plans of business, consumer preferences. Maybe now that people will be more wary of spending, would prefer to save, to defer major or an optional purchase. Anyway, all of this can affect the potential growth rate of the economy as well as the speed of her recovery. To assess the impact on the capacity of immediately difficult. Much will depend on the pace of recovery in the world economy, the situation of the pandemic and the removal of restrictions, from the sentiments and expectations of business and population.
The current economic situation required additional measures of state policy and, in particular, budgetary measures to support business and population. The planned volume of budget measures is expanding. Currently the Government is working on a national economic recovery plan. It is aimed at overcoming the economic effects of coronavirus and recovery, and then raising the potential of the economy. We participate in the discussion of this plan and will take it into account when conducting monetary policy.
As we noted earlier, the main negative effects of the restrictions will fall in the second quarter, in III–IV quarters followed by recovery. The full return of GDP levels in 2019 are likely to occur only in the first half of 2022. While the positive effect of easing of monetary policy is mainly manifested in 2021. This is not only standard actions lags of monetary policy. This is due to the increased credit risk that increase the cost of borrowing. A significant reduction of the key rate just need to compensate for these effects and to provide a tangible easing of monetary conditions for the economy.
Externally, they will be difficult. Yes, the decisive actions of governments and Central banks resulted in the rapid stabilization of the financial markets. However, the fundamentals of the world economy remain weak. The spread of the pandemic until brought under control in all countries, the restrictions are largely preserved, which does not add optimism. Last week, the world Bank and the OECD lowered its forecasts for the world economy in 2020. Besides, there are geopolitical risks, which can also have a negative impact on global economic growth. This is particularly true of the restrictions in trade relations between the major economies.
Low growth of the world economy — an economic reality with which we will long to be considered. For Russia, this means limited opportunities for increasing exports, including in connection with the obligations under the transaction OPEC+.
In these circumstances, the balance of risks remains tilted toward the disinflationary factors. They are mainly related to the uncertain development of the situation with the pandemic in Russia and worldwide, the recovery rate of the economy as the easing of restrictive measures.
Much will depend on medium-term budget policy. Not only now receive support measures, but also plans further fiscal consolidation — how fast and at what horizon it will happen.
Our current policy is aimed at the formation of loose monetary conditions in the economy in conditions of low inflationary pressures and prevailing disinflationary risks. As the economy will return to its potential, will form conditions for returning to a neutral policy. At what time this will happen will depend on all factors, both internal and external. They have already been mentioned above. Ultimately, our monetary policy — in the period when it was hard, and now that she has become soft, is aimed at achieving the objectives of the Bank of Russia the stabilisation of inflation close to 4%.