Source: Central Bank of the Russian Federation in English
Today, we have made the decision to keep the key rate at 4.25%.
The economy continues to recover, albeit at a slower pace than in summer. Financial markets are still characterised by elevated volatility, and geopolitical risks persist. Moreover, the epidemiological situation is deteriorating, which may increase demand-side disinflationary pressure.
I would like to dwell on the factors we considered today.
Firstly, inflation processes are generally evolving in line with our baseline scenario. We forecast that inflation will come in at 3.9–4.2% by the end of the year.
Stable inflation indicators are close to 4%. However, demand- and supply-side factors are changing unevenly, having different impacts on prices in individual goods and service groups. The effect of pent-up demand on inflation has been mostly exhausted. The weakening of the ruble continues to affect the price growth rate. This is evident in non-food categories in the first place.
There is also a range of one-off factors temporarily slowing down the rise in service prices. Specifically, given the current epidemiological situation, the authorities have recommended to limit the increase in prices for educational services. A number of regions have made decisions on only partial indexation of housing and utility rates. Further on, these prices may adjust over time, and we take this into account in our inflation forecast.
Secondly, inflation expectations have increased. To a certain extent, they are responding to exchange rate fluctuations. Businesses are also reporting a rise in costs.
Thirdly, the economic recovery has slowed down, predominantly due to domestic demand trends. This is evident from investment and consumption trends, as well as the leading indicators of consumer and business activity. As noted above, the positive effect of pent-up demand has been mostly exhausted by now. This demand was driving the fast revival of economic activity immediately after the cancellation of the restrictions imposed in spring and summer. This recovery was primarily recorded in sectors focused on consumer goods production. The revival in intermediate goods industries was less pronounced. However, the deteriorating epidemiological situation is hampering the growth of consumption expenditures, affecting companies’ investment plans.
It is still highly uncertain how fast the global economy will be recovering, especially with account of repeated restrictions being imposed in a number of countries. The economic environment is also being affected by geopolitical factors, including trade tensions, the Brexit situation, and the upcoming elections in the USA. The decline in sentiment is increasing volatility in global markets. In such conditions, external demand may hardly be expected to support the economy.
The fourth factor is monetary conditions. We can see that the earlier decisions on the key rate continue to translate into the easing of monetary conditions and banks’ pricing policies. Along with the decrease in interest rates, non-price lending conditions are also easing.
In addition, we also factor in that the preferential corporate and retail lending programmes are becoming increasingly important. In August, the portion of subsidised mortgage loans exceeded 35% in the overall amount of loans disbursed. The total monthly amount of issued mortgage loans hit its record high. As regards lending to small and medium-sized enterprises, the percentage of short-term loans issued at interest rates that are close to 2% per annum rose in August from one-fourth to one-third of their overall amount. These programmes are also indirectly influencing the general pricing environment in the credit market. In the future, we will be estimating how monetary conditions are adjusting as these programmes terminate.
Now, I will proceed to the forecast. Today, as always after the core meeting, we have published our updated baseline scenario. When revising our forecast, we considered a range of factors. The ruble has weakened. The period of the recovery growth, that is, the initial rebound after the lifting of the spring restrictions, has almost ended. The epidemiological situation is deteriorating, which is already affecting economic activity. Nonetheless, export dynamics have turned out to be better than expected, for both oil and gas exports and the exports of other goods, especially gold.
Taking into account the overall impact of competing factors, the GDP forecast has been revised upwards. According to estimates, GDP will go down by 4–5% as of the end of 2020, which is better than it was expected in July.
As to domestic demand indicators, their overall dynamics as of the end of 2020 are expected to be worse than forecast in July. This is associated with the released data on GDP components for the second quarter. The restrictions that were in place over this period had a stronger negative impact on both investment and consumption than it had been assumed. However, the recovery in the third quarter was also faster than forecast. Furthermore, as you know, GDP results for the second quarter were generally better that our preliminary estimates. This was associated with higher exports indicators over this period, compared to our expectations.
Amid the deterioration of the pandemic situation in the fourth quarter and possibly at the beginning of 2021, economic revival will be somewhat slower than we forecast earlier. Therefore, GDP growth in 2021 has been revised downwards by one-half of a percentage point, to 3–4%. Making this adjustment, we took into account the effect of the higher base of 2020, given that the 2020 GDP forecast has been improved.
Now a few words about the 2022–2023 horizon. At the moment, our forecast assumptions and parameters have remained unchanged. The economy will expand by 2.5–3.5% in 2022 and by 2–3% in 2023. We still expect that we will return to the pre-crisis level in the first half of 2022.
Given the current monetary policy stance, inflation is forecast to stand at 3.5–4.0% in 2021 and further remain close to 4%.
Regarding the balance of payments forecast, it has been significantly updated, primarily due to the upward adjustment of export estimates. The current account is expected to be notably higher over the entire forecast horizon. This is related to both the adjusted volume and the expected price environment for Russian export products. We have updated the 2021 average oil price assumption from $40 to $45 per barrel taking into account the current price movements and assuming that the situation in the oil market will remain stable.
Regarding the fiscal policy, we build our baseline forecast on the figures specified in the draft Fiscal Policy Guidelines for 2021–2023. However, when making our key rate decisions, we will consider potential adjustments in the measures implemented by the Government.
Another factor that we take into account is the specifics of the operation of the transmission mechanism in the current conditions. Increased financial market volatility requires that we consider financial stability aspects in our key rate decisions. In a normal situation, cutting the key rate should prompt a decline in interest rates on all financial instruments and a certain weakening of the ruble, which altogether would lead to an easing of monetary conditions. However, in an unstable situation in financial markets with elevated risks, a key rate cut could lead to an increase in interest rates on long-term financial instruments and a more pronounced reaction of the exchange rate than in steady conditions. As a result, monetary conditions could even tighten. Therefore, we should carefully use our room for monetary policy easing given potential financial stability risks.
In conclusion, I would like to speak about our further steps. As I have already said, the worsening of the pandemic situation will have mainly disinflationary effects. A potential slowdown in the global economy will have similar consequences. At the same time, short-term proinflationary risks stemming from the situation in financial markets have strengthened recently. The upward pressure on prices can also be exerted if the epidemiological situation causes a notable influence on both demand for and supply of goods and services. Although the ratio of proinflationary and disinflationary factors may change over the short-term horizon, we believe that disinflationary risks prevail in the medium term. Therefore, we still see room for a key rate decrease.
A more significant influence of disinflationary factors may require more prolonged and, potentially, more pronounced accommodative monetary policy than it is currently stipulated in our baseline scenario.
However, we also take into account that it is important to ensure that our monetary policy is stable under any scenarios in order to maintain inflation close to 4%. This is especially important today when so many diverse factors are influencing the current situation.