Central Bank of Russia will respond in even more conservative manner to pro-inflationary risks - Nabiullina
MOSCOW. Oct 25 (Interfax) - The effects of many mechanisms in the Russian economy have changed due to heightened uncertainty, and in these conditions the Central Bank of Russia will respond in an even more conservative manner to pro-inflationary risks, Central Bank Governor Elvira Nabiullina said at a press conference held following the meeting of the CBR board of directors at which it decided to raise the key rate from 19% to 21%.
"Amid the heightened uncertainty of recent years, the effects of many mechanisms in the economy have changed. We see several reasons why the response of inflation to the rise in the key rate has become less pronounced," Nabiullina said.
"First of all, this is the increased inertia of inflation expectations due to the fact that the inflation rate has been exceeding the target for four years already. The longer the period of the deviation of inflation from the target, the less confident households and businesses are that it will return to its low levels. This is reflected in their behavior: propensity to consume, invest or save," she said.
"The second reason is the impact of expansionary fiscal policy, including as a leverage for taking out loans for those households and companies whose incomes grow due to fiscal spending," she said.
"The third reason is a range of factors in the banking sector. Regulatory easing measures made it possible for banks to expand lending aggressively neglecting the need to maintain a more liquid asset structure and to additionally accumulate capital buffers," she said.
"Finally, this is the Bank of Russia's inaccurate communication at the beginning of the year. Our forecast assumed a reduction in the key rate following the slowdown in inflation. However, that was largely perceived as our intention to cut the key rate in any case. This motivated households and businesses not to reduce their demand for loans," she said.
"These are very different factors, but all of them have had the same effect. Consequently, overheating in the economy has turned out to be stronger, which has led to faster price growth," Nabiullina said.
"Therefore, to achieve the inflation target, we will be responding to pro-inflationary risks in an even more conservative manner. The level of tightness of our monetary policy will be determined by the objective of bringing inflation down to the target," she said.
"We will need a considerably higher key rate path than we assumed in the July forecast. The key rate will average 17.5% in 2024, 17.0%-20.0% in 2025, and 12.0%-13.0% in 2026. In 2027, it will reach its neutral range of 7.5%-8.5%," she said.
