Moderation and caution: the Central Bank remained true to itself when making a decision on the rate

The Bank of Russia's Board of Directors considered only two options for the key rate: maintaining it and reducing it by one percentage point. Perhaps it was this revelation by Elvira Nabiullina that became the main surprise of her September meeting with journalists. The day before, financial analysts almost unanimously assured that there was no talk of maintaining the rate at all and that the Central Bank would lower it "without options" either by a wide step of two percentage points or by a minimal one.

As a result, a very restrained, compromise, and very telling decision was made. The current rate of 17% per annum means that the regulator is clearly and quite reasonably cautious. Yes, the trend towards easing the monetary policy (MP) set several months ago continues, primarily due to the slowdown in economic activity, external demand and inflation.

However, inflationary risks have not disappeared: inflationary expectations remain elevated among all groups – the population, business and financial markets, corporate lending has accelerated, and most importantly, it is unclear what to expect in the foreseeable future from the budget, the budget deficit and government decisions regarding, above all, expenditures.

It is, of course, wonderful that in July and August vegetables and fruits became much cheaper, that the cost of foreign tourist trips, hotel services and some food products decreased “more than usual”. “If we clear the data of the seasonal factor, the price increase was about 4% on an annualized basis. However, this does not mean that we have achieved the goal... We need time to consolidate the disinflationary trend,” Nabiullina noted, recalling, among other things, the double-digit indexation of utility tariffs in July, the summer surge in gasoline prices, and the fact that such things traditionally increase inflation expectations.

Among other theses voiced by the head of the Central Bank, the following can be highlighted: “the statement about a technical recession in the Russian economy is debatable, but there is a cooling”; “the economy will continue to grow this year and next, albeit at a slower pace”; “attempts to accelerate economic growth without balancing supply and demand will lead to an acceleration of inflation”; “consumer demand intensified in July-August”; “demand for passenger cars and housing is growing”; “the key factor in the availability of loans for business is low inflation, lowering rates is not a quick process”; “savings activity remains high, which is facilitated by the growth of household incomes”.

Regarding the ruble exchange rate, Elvira Nabiullina noted that its dynamics are “an important indicator of the degree of rigidity of the monetary policy.”

The key topic of the press conference was predictably the current situation with the federal treasury deficit, which amounted to 4.19 trillion rubles, or 1.9% of GDP, in January-August. The question was raised more than once (other topics looked more like a side dish to the main course), and it was here that the impulses coming from the media intersected with the overt concern of the Bank of Russia's management.

"If the budget deficit is higher than in the Central Bank's baseline scenario, this will limit the ability to further reduce the rate," the head of the regulator said. According to her, the Bank of Russia expects that budget expenditures in 2025 and treasury parameters for 2026-2028 (the government will present them by the end of September) will have a disinflationary effect.

Nabiullina was asked whether it is realistic to achieve the Central Bank’s declared inflation target of 4% next year in conditions where the steady trend in government spending continues: over the past three years, it has been growing by 20%?

"Of course, a lot depends on budget policy," Nabiullina's answer reflected the conceptual position of her team. "It is not so much the extent to which expenses grow that is important, but the budget deficit. If the additional expenses that the state needs are covered by the growth of tax revenues, then this is neutral for inflation and interest rates, since it does not create additional demand. If additional expenses are not covered by taxes and the budget deficit grows, then the budget's contribution to aggregate demand also grows.

Accordingly, to achieve an inflation rate of 4%, the contribution of credit must decrease, i.e., the rates must be higher. The Bank of Russia will be able to achieve the inflation target of 4%, but at higher rates, if the budget deficit grows. Lending to the private sector of the economy works as a system of communicating vessels: the more money the economy receives from the budget, the less from the credit, and vice versa."

The MK correspondent touched upon the topic of bank deposit rates, which are now rapidly falling, reaching the range of 12-15% per annum. Against this background, there has been much speculation that people urgently need to find an alternative for savings. Does the Central Bank monitor how justifiably banks act? Will their behavior not cause a sharp outflow of money from deposits, mass consumer panic?

"We understand perfectly well that in order for deposit rates to remain attractive, they must compensate for future inflation," Elvira Nabiullina noted. According to her, when making decisions on the monetary policy, the regulator monitors the dynamics of deposit rates, ensuring that they protect savings from inflation. At the same time, the Central Bank does not interfere with the interest rate policy of banks - "this is a market process."