The statement of the Chairman of the Bank of Russia Elvira Nabiullina at the meeting of the Board of Directors on July 24, 2020
Today the Board of Directors decided to reduce the key rate by 25 basis points to 4.25% per annum. At the next meeting we will assess whether you would benefit from its further decline.
We continued easing of monetary policy in the first place given that there are still risks of deviation of inflation down from 4% in 2021. It is associated with a significant decline in economic activity, drop in domestic and external demand. Recovery, in our estimation, is more than two years, which will have a moderating influence on price dynamics.
Note that the peculiarity of the moment is the high heterogeneity of development of the situation with the pandemic and mitigation of restrictive measures in the world and in Russia in different regions and different industries. In June the first half of July as easing of the regime of self-isolation was the revival of economic processes in Russia: the reconstructed energy consumption, consumer and investment demand, increased construction and production of consumer goods; slowed the annual rate of decline of freight transport, and industrial production. At the same time, the business and population though has improved, but overall remained cautious, given the continued high uncertainty regarding future developments.
In June the current monthly pace of growth in consumer prices was markedly different for different groups of goods and services given the heterogeneous influence of factors on the demand side and supply for individual markets. After strengthening in March—April, overall inflation pressure is reduced, which is reflected by steady inflation, purified from the influence of single factors. After declining in may and June, inflation expectations of population and business in General has stabilized. With regard to professional analysts, their expectations for inflation next year fell below 4%.
We expect that the heterogeneity of recovery processes in the economy and the price dynamics will continue in the coming months. She can somewhat “saumlaki” the overall picture of evolving trends. But from the point of view of the decision on the key rate and the prospects of monetary policy more important medium-term view on the dynamics of prices and economic activity, taking account of sustainable factors. The economy will return to its potential gradually, and in this connection it will be dominated by the disinflationary trend.
We have not significantly changed the forecast for annual GDP dynamics, taking into account the effect of two opposing factors.
On the one hand, it’s a deeper drop in economic activity, domestic and external demand in the second quarter. It is associated with longer restrictions in Russia and other countries than we anticipated in April. We estimate the decline in GDP in the second quarter to 9-10%.
On the other hand, there has been a significant extension compared to the April budget and other measures to support the economy, which partially offsets the lower revenues, support consumption and investment and promotes a more rapid recovery. In the current forecast, we took into account that fiscal stimulus this year increased almost two times in comparison with those measures that have been taken at the time of the April forecast calculations. In addition, economic recovery will contribute to the easing of monetary conditions, taking into account the substantial reduction of the key rate.
Given these factors, we forecast decline in GDP of 4.5–5.5 percent this year and a subsequent recovery to growth of 3.5–4.5% and of 2.5–3.5% in the next two years. These estimates are mostly within the ranges that we gave in April. As before, we expect that the most significant contribution to the reduction of GDP in 2020 will contribute the fall in external demand that will be reflected in the decline in exports at 13-15%. However, we expect the reduction in investment and consumption in the current year will be approximately equal and will be from 6 to 8%.
Despite the fact that in 2021 is projected notable growth during the recovery, economic activity will still be below the level of 2019 and below potential. This means that the deterrent effect of aggregate demand on the dynamics of consumer prices next year is still not exhausted. Lower current monthly pace of price growth will continue until the end of the year. The return of inflation to 4% will be gradual, given the fact that the recovery of demand, including under the influence of easing of monetary policy, takes time. We forecast annual inflation in the range of 3.5–4.0% in 2021 and further stabilizing near 4% in 2022.
This will remind you that we expect inflation in the range of 3.7–4.2 percent by the end of this year. It is worth noting two points. The first — increase of annual inflation rate from June’s level of 3.2% is due primarily to the exit from the base of the calculation of the low values of the second half of 2019, and not the current pace of price growth. The second point. The expected return of inflation to 4% at the end of the year due to the contribution of temporary proinflationary factors which were realized in March—April. Without this temporary acceleration of growth of prices sustained inflationary pressures in 2020, as I have already noted, is at a low level, below 4%.
The reduction of the key rate, which occurred in April, contributing to further easing of monetary conditions. We see that in the banking sector there is a decline in interest rates. However, we consider that there are factors that may hinder this process. This increased credit risks and the related increase of requirements to borrowers, it and external factors that can cause fluctuations in the risk premium. In addition, we consider that the additional contribution to the easing of monetary conditions now make regulatory concessions and preferential credit programs.
Interest rates on deposits higher than projected inflation. Continued increase in ruble-denominated Bank deposits — annual rate of its growth was 10.9% in June.
The easing of monetary conditions under the influence of the implemented reduction of the key rate will support the credit growth in the current year. We forecast an increase in lending to the economy by 6-9% by end of 2020 and 7-11% in the next two years. It will make a positive contribution to GDP dynamics.
Taking the decision to reduce the key rate, we must consider the plans in relation to fiscal policy, including the forthcoming fiscal consolidation in the years 2021-2022. This year the Government has increased the budget costs more than it suggests a fiscal rule to support the economy and citizens at the time of the powerful negative shock. And it is absolutely justified, especially in the initial phase of the crisis. At this point fiscal policy is able to provide faster and more meaningful assistance to the economy than monetary policy, the effects of which fully manifested only within 3-6 blocks. At the same time, the current monetary easing will largely influence the dynamics of inflation and the economy in the next year, thus offsetting the effect of the upcoming fiscal consolidation. I would like to stress that the Government planned a full refund to the parameters of the budget rules in 2022 is fundamentally important not only for long-term sustainability of public finances, but also for the stability long-term interest rates in the economy and, consequently, the efficiency of the transmission mechanism of monetary policy.
With regard to the balance of payments, we projected a small surplus on current account in 2020-2021 years — at the level of 2-3 billion USD. This is a significant revision of the forecast in comparison with April, when it was assumed the transition the balance of the current account into negative territory. Such adjustment of the forecast is related to two factors. The first is a substantial revision upwards of the preconditions for the oil price: from 27 to 38 USD per barrel in 2020 and 35 to USD 40 per barrel in 2021 with the light of the said recovery of oil prices under the impact of the transaction on OPEC+. This is reflected in the increase in forecast exports. The second factor is more prolonged decline in imports of services which has already occurred in the second quarter owing to the continued closed borders, suspend tourism services, as well as the reorientation of domestic consumption. These limitations may partly continue in the current year.
The increase in predictive estimates of the negative financial account balance for the private sector is largely associated with the adjustment of the forecast for the current account. In the forecast of the balance of payments is also considered the plans of the Ministry of Finance to increase borrowing this year. In comparison with the April forecast assumed a less significant decline in FX reserves in 2020-2021 years to reflect changes in the price of oil and the volume of transactions in the budgetary rules.
The forecast of operations in the framework of the budget rules includes the completion of the sales of foreign currency involved in the transaction with shares of OAO Sberbank. Mechanism when we sell this currency only if the price of Urals oil below $ 25 per barrel terminates before 30 September. At the current state of the global oil market in August—September we plan to implement offsetting nedoprodannye balance of foreign currency in connection with the transaction for the savings Bank with the amounts of all deferred from 2018 currency purchases and prior sales that we had in March—April. The balance of these transactions in the ruble equivalent is 185 billion roubles. This amount of foreign currency will be uniformly implemented in addition to the regular operations in the framework of fiscal rules during the fourth quarter of 2020.
If we talk about the risk factors for the forecast, the uncertainty remains significant, and concerning the nature of the downturn and the recovery processes in the Russian and world economies, and how pandemic and restrictive measures could affect the economic growth potential in Russia and in the world. This includes the potential recovery of production and possible changes in consumer and savings preferences of the population. These factors, in turn, can have a significant impact on the inflation forecast.
Additional uncertainty from the external environment creates increased conflict between the U.S. and China, which creates risks for global growth and the dynamics of world commodity and financial markets. Remain the risks and by other geopolitical factors.
In addition, at this stage in terms of ongoing restrictions difficult to evaluate how quickly and widely the reduction of the key rate will be broadcast in easing monetary conditions further in the dynamics of economic activity and inflation. As we noted earlier, in the near future will be to operate a large number of different reasons.
Pay attention to the fact that at this meeting we moved on to our standard step in changing the key rate, considering that it is now required more fine-tuning of monetary policy under the baseline forecast, in contrast to the situation in previous months, when he was justifiably strong reaction of monetary policy in response to shocks. In the future we will evaluate the nature of changes in monetary conditions, the nature of recovery processes in the economy, the dynamics of prices and to assess the feasibility of reducing the key rate at the next meeting. In General, we believe that will still be a space for monetary policy easing.
Deciding on the key rate, we also discussed where the range of the neutral rate. At this stage, we have revised down our estimate for the range of neutral interest rates in real terms up to 1-2% — with 2-3%. This means reducing the range of nominal neutral rate to 5-6% given the purpose of annual inflation close to 4%. Estimation of the neutral rate is primarily due to the change in external factors, including the formation of interest rates in the world economy at a lower level. We also took into account the decline in country risk premium. At the same time remember that the neutral rate is largely notional, not directly observed indicator that is dependent on a very wide range of factors. Evaluation of interval neutral rate formed on the basis presented to us a comprehensive analysis.
And in conclusion once again I will emphasize that their decisions on monetary policy we accept primarily based on the aim of stabilizing inflation goal of close to 4%.