Elvira Nabiullina: ‘We believe that it is a benefit to have a floating exchange rate’

Two arguments in favour of lowering the key rate

On February 28, a few days after the start of Russia's special operation in Ukraine, the Central Bank raised the key rate from 9,5% to 20% per annum. The regulator explained its decision by a radical change in external conditions for the Russian economy. From April 11, the rate was reduced to 17%, and 18 days later — to 14%, not excluding further reduction.

“The reduction of the key rate will contribute to the structural restructuring of the economy without creating pro-inflationary risks," said Nabiullina.

There are two arguments in favor of lowering the rate. The first is the reduction of inflationary pressure and inflation expectations:

“This reflects the exhaustion of the feverish demand of the population and the strengthening of the ruble. In the last two weeks, the current inflationary pressure has stabilised after a sharp increase in early March. However, it continues to remain high. Inflation expectations of the population in April returned to the levels of the middle of the previous year. According to population surveys, the expected inflation is lower than the observed one, that is, people believe that prices will not grow so fast," the head of the regulator said.

The second argument is a decline in economic activity:

“The disruption of technological, production and logistics chains, the stoppage of the activities of some foreign companies lead to a decrease in the assortment and availability of many consumer goods. One of the most characteristic examples is the automotive industry. The companies that have used foreign raw materials or components, whose stocks are gradually running out, are experiencing serious problems. The question is how much these difficulties will be temporary, how quickly businesses will be able to find new suppliers and replace the links that have dropped out of the production chain," she noted.

According to her, investment demand is now declining due to uncertainty in the economy — companies are more likely to invest their spare money in risk-free assets or return it to shareholders than direct it to development. Some of the investment projects have completely lost their relevance and can no longer be completed.

Inflation will peak at the end of the year, and it will return to the goal of 4% only in 2024

At the end of the year, GDP will decline by 8-10%, while the lowest point of the decline will be in the fourth quarter.

“Gradual exhaustion of supply and demand shocks, monetary and fiscal policy, as well as structural measures of the government, will contribute to the resumption of economic growth from the beginning of next year. Due to the high comparison base of the first quarter of this year, the change in GDP as a whole for next year in comparison with the whole of 2022 will be from 0 to minus 3%," Nabiullina noted and reported that by the end of 2023 GDP would increase by 4-5,5% compared to the end of this year.

But the situation on the labour market is calm — according to the head of the Central Bank, there was historically low unemployment in March, although she did not name the figures.

“However, the ongoing transformation of the economy poses new challenges to the labour market. The employment structure will inevitably change. A significant redistribution of labour resources may be required, both between industries and professions, and geographically. We will assess how these processes will affect the pace of structural adjustment of the economy, and hence the inflationary processes," Nabiullina stressed.

Other forecasts of the head of the Central Bank:

• The balance of payments surplus may amount to $145 billion — but this situation is unfavourable and reflects only that imports are declining much more than exports.
• This year, inflation will reach 18-23% — it will be affected by restrictions on the supply of goods and services. The peak will be at the end of the year.
• Annual inflation for the next 12 months as of April 2023 will be in the range of 10-12%.
• As a result, inflation in 2023 will decrease to 5-7%, and in 2024, it will return to the target of 4%.
• The current forecast for the average key rate for this year is 12,5-14%, for the next — 9-11% and for 2024 — 6-8%.

“We are being in a zone of enormous uncertainty. At the same time, very significant changes are taking place both on the supply side and on the side of factors affecting composite demand. Today, the decline in supply outstrips the decline in demand, but the situation may change in the future. This means that both pro-inflationary and disinflationary effects are possible. So far, the most likely scenario for us is when pro-inflationary factors and risks prevail," Nabiullina noted.

“We, as the banking regulator, cannot be the owner of a bank for a long time”

The head of the Central Bank also touched on other topics. She said that the regulator supported the merger of VTB, Otkritie and RNCB:

“You know, we were preparing Otkritie, working with potential investors, and, by the way, they were. But now, in the foreseeable future, we do not see an opportunity to sell Otkritie Bank to the market, but we understand that we, as the banking regulator, cannot be the owner of the bank for a long time," Nabiullina said.

According to her, the configuration of the bank merger deal is still under discussion.

“We don't target any exchange rate level”

Linking the ruble to gold is out of the question, said the chairperson of the Bank of Russia. A few days ago, the Secretary of the Security Council of the Russian Federation, Nikolay Patrushev, spoke about a project to create a dual monetary and financial system in Russia, where the ruble will be backed by gold and goods — currency values.

“The regulator proceeds from that with those restrictions on capital flow within the current account, the exchange rate should remain floating, should be balanced depending on how much exporters sell, how much importers, respectively, buy," she said. “As for a compromise rate that would be beneficial to both exporters and importers, I would like to emphasise once again that we do not target any level of the exchange rate. We believe that it is a benefit to have a floating exchange rate, but now it is within the limits of capital flow restrictions. And we do not have such a task — to look for some kind of compromise rate.

She also touched upon restrictions on the purchase of cash currency by citizens. According to her, it is hardly possible to remove them ahead of schedule, before September.

“There is no question of any default”

Nabiullina also once again stated that there would be no default in Russia.

“As for the fulfillment by the Ministry of Finance of its obligations to pay debts: I would like to note once again that the Ministry of Finance has resources, and from an economic point of view, there can be no question of any default," she assured.

At the same time, the head of the Central Bank clarified that there are difficulties with payments: “I hope that all this will pass and end successfully.”