MOSCOW (Reuters) – Russian Central Bank Governor Elvira Nabiullina and her deputy Alexei Zabotkin addressed a news conference on Friday after the central bank cut its key rate to 17% from 18%.
They spoke in Russian and the quotes below were translated into English by Reuters.
*ZABOTKIN ON REASONS FOR FLUCTUATIONS IN ROUBLE EXCHANGE RATE
I would like to emphasise that the fluctuations we have been seeing over the last three months are occurring at the lower end of the range in which the exchange rate has been trading for the last two years.
Therefore, it is probably not worth talking about some kind of systematic weakening of the exchange rate. In fact, the fluctuations are occurring at levels that are relatively strong compared to the history of the last two years.
*NABIULLINA ON THE IMPACT OF THE STRENGTHENING OF THE ROUBLE ON PRICES
From our point of view, the main disinflationary effect (of the strengthening of the exchange rate) that occurred has already ended.
*NABIULLINA ON POSSIBLE TAX INCREASES
When making decisions, it is important for us to consider how balanced the budget is. The smaller the budget deficit, i.e. if there are additional expenses, it is better for them to be covered by revenue rather than by increasing the budget deficit, because if the budget deficit grows to cover necessary expenses, our rate will be higher.
*NABIULLINA ON RECESSION
Commentators tend to refer to two consecutive quarters of real GDP decline as a technical recession. However, there are three considerations in this regard. First, it is incorrect to consider this a recession if other indicators do not confirm it.
Second, GDP data, especially quarterly data, is subject to significant revisions. That is why macroeconomists do not base their assessment of the economic situation solely on GDP, but must look at a more multifaceted picture. Third, estimates of seasonally adjusted GDP dynamics vary significantly.
Indeed, in the first quarter, our GDP declined after a strong jump in the fourth quarter of 2024. And according to our estimates, which we will refine further, seasonally adjusted GDP in the second quarter of this year was higher than in the first quarter.
Therefore, even the assertion of a technical recession today seems, at the very least, debatable. We do indeed have a cooling of the economy. This is natural when coming out of overheating, when production capacity must catch up with demand, as we keep saying. It’s like when you’re running: the faster you accelerate, the higher your heart rate rises, and the longer you have to run slower than usual to lower your heart rate and return to a steady pace. That is why we say that the greater the overheating, the more significant the slowdown that may follow.
Yes, the situation varies across sectors. In sectors that are oriented towards external demand, the decline is greater, and it is linked to a reduction in external demand and prices for our export goods, as well as the continuation of structural shifts in the economy, because the economy is increasingly oriented towards the domestic market. The decline in employment and capacity utilisation in these export-oriented sectors, given these structural changes, is not in itself a sign of recession.
As for domestic demand, we are seeing continued growth, albeit at a slower pace than in the previous two years. And, according to our estimates, domestic demand in the second quarter was higher than in the first quarter, adjusted for seasonality. And if we look at the first half of the year as a whole, consumption and investment were higher than in the second half of 2024, but again with a seasonally smoothed expression.
What indicators do we use to judge this? We look at a wide range of indicators, including monitoring of enterprises. We have an extensive sample of enterprises that make assessments of current demand and expected demand.
In addition, we rely on information about payments through the bank’s payment system, analyse data from cash registers, and so on. Based on this operational data, what can be said about the last two months, July and August? They are uneven, but overall they indicate some increase in consumption.
NABIULLINA ON PAYMENT SYSTEMS BETWEEN RUSSIA AND CHINA
We do not comment on the details of cooperation in the field of international settlements. In general, I can say that despite external restrictions, our banks and companies are developing various alternative payment methods. Therefore, international settlements do not currently have any impact on stability and monetary policy.
NABIULLINA ON ECONOMIC GROWTH
According to our estimates, the economy will continue to grow this year and next, albeit at a slower pace than in the previous two years. There can be no other outcome after the overheating, but it is still growth. Moreover, the more severe the overheating, the more noticeable the economic slowdown will be.
When will growth accelerate again? In our view, when potential catches up with demand, when we finally emerge from overheating, and both demand and supply grow at a steady pace. For inflation, this will mean a steady return to 4%, and for interest rates, a return to neutral territory. We currently estimate this neutral territory to be 7.5%-8.5%.
However, the reasons for the acceleration in growth are not the reduction in interest rates themselves, but the fact that the reduction in interest rates will mean that the economy is returning to a balanced state, with demand no longer outstripping production capacity. In the baseline forecast, this will happen by the beginning of 2027.
If we try to accelerate growth now, before demand has caught up with the supply of goods, services, and production, inflation will accelerate and ultimately undermine sustainable growth. Therefore, we are determined to bring inflation down to sustainably low levels.
NABIULLINA ON OPTIONS FOR KEY RATE DECISION
Two options were considered at the meeting: lowering the rate by 1% and keeping the rate unchanged. The arguments in favour of keeping the rate unchanged were that monetary conditions had eased significantly and that we needed to assess the consequences of the decisions already taken. And, of course, we will need to obtain more information about what the budget policy will ultimately be.
NABIULLINA ON THE BUDGET FACTOR
Our decision today reflects our understanding, based on the information currently available, of how the budget will shape up at the end of 2025 and its parameters for 2026, 2027 and 2028. We assume that the budget will be disinflationary for the year, but the extent of this will be clarified when amendments to this year’s budget are made. We expect the government to present specific quantitative characteristics by the end of September, and we will include them in our forecast update at the October meeting.
And, of course, the budget factor is always important, as is the predictability of budget policy in general.
NABIULLINA ON THE EXCHANGE RATE
“We always take into account exchange rate dynamics. This is an important indicator of the degree of monetary policy tightness and the main indicator through which changes in external conditions affect inflation. With a monetary policy aimed at low inflation, a stable, self-sustaining weakening of the exchange rate is impossible.
But fluctuations do occur. They are inevitable when economic conditions change. And, of course, we analyse all these factors when making decisions.”
(Compiled by Filipp Lebedev; Editing by Mark Trevelyan)
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