Elvira Nabiullina: ‘Banks won’t need the state’s support’

Rate will be falling when economy opens

The Board of Directors decided to lower the key rate by 50 basis points to 5,50% a year on 24 April, said the Central Bank. Then, as usual, the head of the Bank of Russia gave a speech in front of the press with detailed comments on this decision explaining the logic of actions of the regulator to soften the monetary policy for the financial market. Elvira Nabiullina directly claimed that a decisive step was taken “to switch to a softer monetary policy”. She said the CB allowed the possibility of a further reduction in the key rate — to 4,5% if the situation developed according to the updated basic forecast of the Bank of Russia, and when the economy got rid of the pressure of anti-epidemiological sanctions.

The head of the CB explained that the course for a further softer monetary policy was necessary to stimulate demand, which had almost collapsed at the moment. “There is not much sense in stimulating now when there is supply (Editor’s Note: when enterprises aren’t operating and manufacturing goods),” she said. The head of the CB gave to understand that after we got out of the crisis, they would have to stimulate demand a lot — a serious fall was expected by the end of the year.

The question of when the economy would start running again remained open. Because nobody today can assume how the pandemic will develop further. According to Elvira Nabiullina, the uncertainty about the time when the key rate will decrease again is explained by the fact that there can be “new outbreaks of volatility in global financial markets in the future”. Nevertheless, she carefully assumed that the economy could open in the second quarter.

If Central Bank prints money and hands it out...

The head of the CB is still against the idea of widespread money handout to the population. In her opinion, this won’t save the citizens but worsen the already complicated economic situation. Helicopter money will just explode inflation, while the citizens’ money will simply devaluate because of the synchronised rise in prices, she thinks.

“Nobody has spilt money from a helicopter, though many countries are talking about it. If we imagine that we as the Central Bank will print money and hand it out at a zero rate, what will it bring to?” she took a pause. “I remember the 1990s. This will explode inflation, and it will be hard for people who will receive these banknotes to buy something,” she said. According to her, the Central Bank’s task is to save the citizens’ savings, this is why measures to control inflation at 4% a year are being taken.

As for inflation, Nabiullina noted the Central Bank saw a risk of deviating from the goal of 4% in 2021 in the middle term too. “By our estimates, a softer monetary policy is necessary to maintain annual inflation at around 4%, which is forecasted. The fall in the domestic and external demand this year will significantly restrain inflation, which creates risks of its significant deviation downwards in 2021 in the middle term without additional measures of the monetary policy,” she said.

No banking crisis

Several authoritative mass media simultaneously asked if the CB allowed a repetition of the banking crisis. “No,” the chairman of the Bank of Russia categorically replied.

“A banking crisis in Russia in the current conditions is impossible. And banks won’t need the state’s support.”

The head of the CB explained that, on the one hand, the pandemic couldn’t help but influence the situation of banks: the number of assets had reduced, loan restructuring would reduce fee income. On the other hand, the banking capital in the last years has been accumulated, while regulatory concessions will be very serious now. “The buffer of banks’ capital is 5 trillion rubles. It is necessary to absorb losses. They can stretch in time,” she added and outlined the source of survival of the banking sector.

At the same time, the CB is forecasting a significant slowdown in retail lending. According to her estimates, consumer loans will go down by 5%, car loans — by 10%. While mortgages will increase, the regulator is predicting — mainly thanks to a concessionary mortgage programme at 6,5% a year. “The demand from the population has decreased, but banks have begun to carefully start granting loans too,” Mrs Nabiullina concluded.

Elvira Nabiullina especially talked about interest-free loans to pay salaries, which are unwillingly granted by banks.

“Their pace is low, and this has concerned,” she said answering to the journalists’ questions. According to her, a longer guarantee from Vnesheconombank could become a solution. Now VEB is covering 75% of loans, banks have the rest of 25%. “They are afraid of taking a risk not to accumulate bad loans under their belt,” she explained and urged regional banks to join this programme more actively.

We will avoid recession if third quarter is better than second one

The regulator is forecasting that the fall in Russia’s economy in the second quarter of 2020 could be 8%. “We think that the main fall in GDP, the main blow will be in the second quarter. Our current assessments are that GDP might decrease to 8% in the second quarter. But then the economy will start to gradually recover, and this is why the third quarter will be better than the second one, the fourth will be the third one,” Nabiullina said.

A recession can be avoided if a recovery begins in the third quarter. While the countries’ economic supporting measures announced by the Russian government will allow reducing the fall in GDP by 2%.

“The study of their impact on GDP will be specified according to the efficiency of these measures. Our temporary evaluation now is that the already announced measures are maintaining GDP at 2%,” she said and added that without state support the decrease in economic growth would have been deeper. A reduction in exports whose volume will reduce by 10-15% in 2020 will make the biggest contribution to the decrease of Russia’s GDP. The economy is expected to recover in 2021 when GDP increases by 3,5% and by 1,5-2% in 2022.