Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017

Transcription

1 Draft as of The Central Bank of the Russian Federation (Bank of Russia) Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017

2 Approved by the Bank of Russia Board of Directors on 26 September 2014 The Central Bank of the Russian Federation, Moscow, 12 Neglinnaya St.

3 Contents Foreword by the Governor of the Bank of Russia... 3 I. Medium-term monetary policy objectives and goals... 6 II. Russia s economic development and monetary policy in II.1. Monetary policy implementation conditions and key measures...10 II.2. Use of monetary policy instruments...17 II.3. Exchange rate policy of the Bank of Russia...20 III. Macroeconomic development scenarios and monetary policy in IV. Monetary policy instruments in Glossary...34 Appendix...39 Statistical tables...39 Key macroeconomic indicators...41 Macroeconomic development scenarios...42

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5 Foreword by the Governor of the Bank of Russia Monetary policy of the Bank of Russia faces challenging issues on the back of current economic situation in Russia and recent developments in the Russian financial market. Geopolitical problems occurred amid the exhaustion of the traditional sources of economic growth started in the preceding years have become a serious challenge to Russia s economic policy in general and to monetary policy in particular. In the face of increased uncertainty the determination of clear guidelines for households and firms has become crucial for domestic longterm investment and economic growth. Sustainable output growth is impossible without increased labour productivity and technological modernisation. This, in turn, requires structural changes and inexpensive market funding for long-term investment to emerge. Lenders will be ready to provide long-term funding at moderate rates only in case they are sure that high inflation will not destroy their investment. Therefore maintaining low and stable inflation will become one of the key conditions for long-term money to arise. In this regard, in order to achieve the monetary policy objective of maintaining price stability stated in the Law, the Bank of Russia is going to complete the longstanding transition to the inflation targeting regime in 2015, as planned. Price stability implies achieving and maintaining steady and low rates of consumer price growth. Low inflation ensures maintaining the purchasing power of the national currency, i.e. that of wages and pensions, which is a necessary condition for raising the living standards of Russian citizens. Low inflation also creates a more predictable environment for long-term planning and economic decisionmaking. Stable prices allow households to increase their ruble savings. Savings in turn are a longterm source of investment. By ensuring growth in investment, price stability contributes to structural changes in the Russian economy in the long run. In recent years, some progress was achieved in reducing inflation, but it has accelerated significantly this year as a result of the influence of a number of unforeseen factors: worsening of the geopolitical situation that contributed to the depreciation of the ruble, imposing external trade restrictions and adverse markets conditions for certain food products. According to Bank of Russia estimates, inflation will exceed 7% by the end of the year, i.e. it will remain significantly higher than a 5% target. In this situation, it is important to continue pursuing the monetary policy aimed at slowing down consumer price growth. Our objective is to reduce inflation to 4% in the medium run. This is an ambitious goal. 3

6 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 However, we are not trying to achieve it as soon as possible and at any cost. We plan to reduce inflation to the target gradually, taking into account the potential of the Russian economy. According to our estimates, in case the imposed trade restrictions remain effective, as announced, for a period of one year, and in the absence of new negative factors, the decline in consumer price growth to 4% is possible in 2016, and with no significant slowdown of the economy. Considering the necessity of investment in order to support healthy economic growth, i.e. that is not combined with acceleration of inflation, along with the importance of borrowed funds, being the source of investment projects financing, for companies, the Bank of Russia uses non-standard tools of liquidity provision. This year loans with maturities of 3 and 12 months were supplemented with loans with maturity of one year and a half. In spring, the Bank of Russia established the tool to provide 3-year loans backed by bonds placed or loans extended in order to fund investment projects at the key rate less 1 percentage point. The Bank of Russia ensures the achievement of the inflation target primarily by affecting the price of money in the economy, i.e. interest rates. Through its operations with the banking sector, the Bank of Russia directly affects only the most short-term rates of the money market aiming to keep them close to the key rate. This impact should be sufficient for changes in the key rate to be reflected in the interest rates on bank loans and deposits that affect consumption, saving and investment decisions, and, therefore, economic activity and inflation. It is true that in Russia this mechanism is still underdeveloped. In recent years, we have been consistently improving operational framework in order to steer money market interest rates in a more efficient way. Our goal is to earn market participants confidence, to tie their expectations of interest rates dynamics to the key rate. Consequently, interest rate dynamics will become more dependent on monetary policy decisions and less subject to influence of other factors. This will strenghten the impact of Bank of Russia decisions on economy and will help the Bank of Russia achieve its goals more effectively. The Bank of Russia sets the key rate in such a way as to achieve the inflation target in the medium run. The rationale of this approach is the fact that the monetary policy affects the economy not immediately but gradually, i.e. with a lag. Therefore, when making a decision on the key rate, we rely on the forecast of economic development. Unforeseen factors may result in significant fluctuations in inflation and its deviations from the target. A symmetric range of these deviations is estimated by the Bank of Russia at 1.5 percentage points on each side. Since the monetary policy cannot affect current prices, the Bank of Russia s response to these unforeseen factors shall be determined based on an evaluation of their effect on prices in the medium run. The spreading influence of such factors on a wide range of prices, leading to higher inflation expectations and a threat of deviation from the inflation target in the medium run, is a reason for changing the key rate. An important step towards improving the efficiency of monetary policy influence on the economy will be the transition to a floating exchange rate regime. The floating exchange rate will allow the Bank of Russia to focus on steering interest rates and achieving the inflation target. At the same time the abandonment of interventions does not mean the absence of the Bank of Russia impact on the ruble exchange rate. By changing the key rate, the Bank of Russia also affects the exchange rate. In addition, the transition to the floating exchange rate does not mean that the Bank of Russia will cease monitoring the domestic foreign exchange market. In case of an emerging threat to financial stability, the Bank of Russia can buy or sell foreign currency to stabilise the situation. Another important condition for a sustained reduction in consumer price growth is to ensure lower inflation expectations. To do that, a high level of confidence in the policy conducted by the central bank is required. Credibility should be gained not only through the achievement of the goals set, but 4

7 Foreword by the Governor of the Bank of Russia also through understanding the pursued monetary policy. To this end, the Bank of Russia maintains active communication with the public. The specified features reflect the essence of inflation targeting regime. This monetary policy regime has been successfully used by many developed countries and emerging economies that have pursued it in the periods of high economic uncertainty. A clear understanding of the ultimate goal and flexible decision-making in response to a changing environment make inflation targeting a natural choice for a monetary policy regime in these difficult times. Foreign experience shows that the transition to inflation targeting not only helps reduce consumer price growth, but also fosters economic growth which is confirmed by numerous studies. By ensuring low and steady rates of consumer price growth under the inflation targeting regime, the Bank of Russia encourages long-term debt market development and creates favourable conditions for investment decisions. Thus, we contribute to conditions required for sustainable growth of the Russian economy. Elvira Nabiullina 5

8 I. Medium-term monetary policy objectives and goals The primary objective of the single state monetary policy is to ensure price stability which implies achieving and maintaining steady and low inflation. Price stability is required to raise and keep a high level of the living standards of Russian citizens, the latter being an ultimate objective of the state economic policy. Starting from 2015, the Bank of Russia will operate an inflation targeting regime. In view of this, the Bank of Russia has set the goal of reducing inflation to 4.0% in 2016 and subsequently maintaining it close to this rate. The permanent target of 4.0% has been set considering the specific features of the Russian economy and price dynamics in the countries that are Russia s trading partners. The target for 2015 is kept unchanged at 4.5%. According to baseline macroeconomic forecast of the Bank of Russia these targets can be achieved without posing significant risks for sustainable economic growth, even though considerably higher rates of growth in consumer prices are expected in late 2014 and early Taking into account a large share of highly volatile consumer price index components, the Bank of Russia has also specified a symmetric range of deviation from the target by 1.5 percentage points on each side. The range reflects the most likely range of inflation values owing to the impact of unforeseen factors. The inflation target is set for the consumer price index (CPI), which is measured relative to the corresponding period of the previous year. This indicator characterises a change in the prices of a basket of goods and services consumed by an average household and helps assess the magnitude of the impact of inflation on public welfare. The CPI is the most easily perceived inflation measure widely used by economic agents. Therefore, its dynamics considerably influence inflation expectations. The monetary policy affects inflation through interest rates. By conducting its monetary policy, the Bank of Russia exerts a direct impact only on the money market being the short-term segment of the financial market in order to limit its intervention in financial market pricing. The Bank of Russia uses a key rate as a benchmark for money market rates, which is set considering the prospects of achieving the inflation target and reflects the Bank of Russia s monetary policy stance. The Bank of Russia seeks to keep money market rates close to its key rate by setting the parameters of its operations. An abandonment of a regulated exchange rate of the ruble against foreign currencies is a necessary condition for the efficient steering of interest rates. By the end of 2014, the Bank of Russia will complete the transition to a floating exchange rate regime. In recent years, the Bank of Russia has been conducting foreign exchange interventions solely for the purpose of smoothing excessive exchange rate volatility without setting any fixed limits on the exchange rate level and 6

9 Medium-term monetary policy objectives and goals the range of its fluctuations. Under the new exchange rate policy regime, the Bank of Russia will abandon its domestic foreign exchange market operations designed to influence the exchange rate, except for the cases when it is necessary to maintain financial stability. In addition to contributing to more complete control over money market rates, the transition to the floating exchange rate regime will make the economy more resilient to external shocks and help it adapt to them through changes in the exchange rate. Money market rates affect other interest rates in the economy and asset prices, as well as exchange rate dynamics, which in turn determine economic agents consumption, saving and investment decisions and finally impact inflation. The monetary policy influences the economy through several channels. An inflation response to a change in the key rate depends on the channel and may vary from several months to two years. However, the greater part of the monetary policy effect on inflation manifests itself between twelve and eighteen months. Therefore, the Bank of Russia takes its monetary policy decisions on the basis of a medium-term macroeconomic forecast and risk assessment of achieving the inflation target. The Bank of Russia will continue improving its modelling tools and internal decision-making procedures to raise the quality of economic analysis and forecasting. Anticipated medium-term deviation from the inflation target lays the ground for changing the key rate, should this deviation be of steady and continuous nature. The Bank of Russia does not respond to the temporary acceleration or deceleration of inflation induced by nonmonetary factors, which are of shortterm nature or specific for some segments of the consumer market, if inflation is expected to return to the medium-term target. At the same time, the Bank of Russia focuses on the analysis of the impact of these factors on the prices for a wider range of goods and services, and inflation expectations. The emergence of temporary factors that pose risks for achieving the medium-term inflation target is a reason for changing the key rate. While implementing its monetary policy, the Bank of Russia seeks to smooth out fluctuations of economic activity and financial indicators relative to their fundamental levels, inasmuch as this does not prevent it from achieving the inflation target. Specifically, when inflation exceeds the target, the speed of its decline to the required pace will be determined considering the need to avoid the economy s excessive cooling down. On the contrary, if inflation is below the target, the speed of its increase is determined in such a way as to avoid excessive overheating of the economy. Thus, a cyclical slowdown ceteris paribus is a reason for loosing monetary policy, while a cyclical boost - for monetary policy tightening. Economic agents expectations about future inflation dynamics, as well as those about the further movement of short-term interest rates and other economic indicators have a substantial impact on inflation. Active communication allows the Bank of Russia to increase its influence on expectations and raise the efficiency of monetary policy measures. The regular announcement of objectives and measures taken by Bank of Russia, as well as its efforts to explain the nature of inflationary processes in Russia and monetary policy results to the public contribute to better understanding of Bank of Russia s monetary policy and help to raise confidence in its actions. In addition to price stability, the Bank of Russia also ensures stable functioning and development of the banking sector, financial market and payment system. This goal and the inflation target are equally important and considered to be complementary long-term objectives. Specifically, the Bank of Russia believes that the efficient and smooth operation of the financial system is required for implementing the state macroeconomic policy, including, 7

10 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 inter alia, monetary policy. In some cases, when both goals cannot be achieved simultaneously, decisions are taken as the case may be, based on the analysis of risks and the assessment of their long-term effects. Fostering cooperation with federal authorities in tariff administration, tax policy, the management of government accounts with the Bank of Russia and communication play an important role in monetary policy implementation by the Bank of Russia. At the same time, the successful implementation of the state economic policy will largely depend on the Russian Government s measures aimed at ensuring a balanced budget and carrying out consistent structural reforms which are necessary for sustainable economic growth in the long run. 8

11 II. Russia s economic development and monetary policy in 2014 In 2014, the Bank of Russia implemented its monetary policy under challenging circumstances. Events in Ukraine and the restrictions imposed by a number of countries on the Russian economy had a negative impact on the situation in the domestic financial market and in the banking and real sectors. Amid the increase in geopolitical tensions, large-scale capital outflow from the Russian financial market and worsening expectations of economic agents in relation to economic development prospects, investment demand fell, adding further to the structural slowdown in economic growth which started roughly two years ago. As a result, the position of the Russian economy in 2014 significantly deviated from the baseline scenario described in the Guidelines for the Single State Monetary Policy in 2014 and for 2015 and Thus, instead of the previously expected GDP growth to about 2% in 2014, the Bank of Russia is forecasting a slowdown in economic growth over this period to 0.4%. At the same time, due to the specific impact of external factors on the behaviour and expectations of economic agents, inflation risks have increased considerably. Foreign exchange rate dynamics (the gradual fall in the value of the Russian ruble from late 2013 to early 2014 on the back of changes to the policy of the US Federal Reserve System (Fed) and the drastic weakening of the ruble in March 2014 amid the growing geopolitical tensions) triggered the acceleration of consumer price growth and increase in inflation and depreciation expectations of economic agents. Annual inflation increased to 7.5% in July from 6.1% in January Restrictions imposed on the imports of a number of food products led to accelerated growth in consumer prices in August. Alongside the probable impact on inflation expectations caused by changes to tariff and tax policy which are currently under discussion, this could lead to continued high inflation until the end of Faced with these conditions, the Bank of Russia undertook certain decisive measures. The key rate was raised considerably to limit inflation risks. Together with the temporary tightening of the FX intervention mechanism, this allowed the Bank of Russia to stabilise situation in the FX market and avert any significant risks posed to financial stability. In addition, the observed growth in interest rates for banks ruble deposits contributed to a recovery in the inflow of funds to ruble deposits and a fall in the dollarisation of bank deposits. The moderately tight monetary policy pursued by the Bank of Russia is establishing necessary prerequisites for the stabilisation of exchange rate and inflation expectations, together with the normalisation of households propensity to save, and is geared towards achieving the mediumterm inflation target at 4%. 9

12 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 II.1. Monetary policy implementation conditions and key measures External economic conditions In January-August 2014, the smooth recovery of the global economy continued amid low, albeit steadily growing, inflationary pressure. At the same time, the situation was not uniform: GDP and inflation exhibited significantly different dynamics in various countries. In addition, in Q1 a number of negative factors (primarily, the unfavourable weather in the USA, market participants concerns about a possible debt crisis in China and measures taken by the country s authorities to contain the growth of debt burden and property prices) contributed to a significant drop in GDP growth rates in many countries. In Q2, economic growth in the USA and China picked up. However, the slowdown of the global economy in January- March was large enough, so that international organisations global economy growth forecasts were revised downwards for 2014 on the whole. In particular, the forecast published by the International Monetary Fund (IMF) for 2014 was reduced from 3.7% to 3.4%. Similarly, economic growth in the euro area continued to slow in Q2, and current business indicators do not suggest that it will accelerate in Q3. Despite steady growth in inflationary pressure in January-August 2014, inflation levels in Russia s trading partners remained low compared with average historical values due to weak economic activity. Annual inflation in OECD (Organisation for Economic Cooperation and Development) member states was 1.9% in July, slightly higher than at the start of the year (1.7%). Core inflation remained at 1.9%. However, overall price stability masked divergent trends in different countries. Inflation in the USA accelerated over the period under consideration, and in August reached 1.7% (year on year) compared with 1.5% the year before. In contrast, inflation in the euro area continued its downward trend, remaining at a level far below the European Central Bank (ECB) policy target. In August, annual consumer price growth was 0.4%, according to preliminary estimates (1.3% the year before). In this climate, the ECB reduced its policy rates twice over the period under consideration, on 11 June and 10 September, and introduced additional measures to tackle low inflation and address fragmentation. Financial conditions were easing for the majority of emerging markets in January-August Long-term interest rates and implied volatility indicators in developed economies dropped and stock market indices increased, surpassing historical highs. Against this backdrop, the capital flows to emerging markets renewed, despite the weak economic activity and the strengthening of national currencies against the US dollar from February. Accommodative stance of U.S. Fed monetary policy and additional actions of the ECB promoted low yields in international capital markets. Balance of payments In January-June 2014, the Russian Federation s balance of payments was shaped amid sharp growth in the private sector s net capital outflow compared with the same period in A significant amount of this capital outflow was offset in roughly equal shares by growth in Russia s current account surplus and fall in international reserves. Amid the on-going tension in the Middle East and steady growth in demand for oil as the global economy recovers, the average price of Urals crude in the first half of 2014 was $107.8 per barrel, 0.9% higher than in the same period the year before. Consistently high energy prices and the fall in the ruble exchange rate (the real effective exchange rate of the ruble in January- 10

13 Russia s economic development and monetary policy in 2014 June 2014 was 6.4% lower than in January- June 2013) contributed to growth in goods exports in January-June by 1.3% compared with the corresponding period in 2013, to $255.6 billion. In the second half of 2014, oil prices will have a moderating effect on commodity export dynamics. From June to August 2014, the average monthly price of Urals crude fell from $109.6 to $101.4 per barrel. At the same time, the contraction of the import of goods continued: compared with the first half of 2013, it decreased by 5.1% to $152.8 billion. Weakening business activity and the ruble depreciation had a restricting effect on imports. As a result, in January-June the trade surplus increased by 12.5% compared with the same period in 2013 to $102.8 billion. The current account surplus rose by 53.6% to $41.2 billion. The capital account deficit was $10.1 billion in the first half of 2014, reflecting the $10-billion North Korean debt written off in May for loans granted by the USSR. In July, Cuba s debt, totalling $32 billion, was also written off. The general government s foreign assets were reduced by the corresponding amount. In January-June 2014, compared with the same period the year before, the amount of balance of payments financial account operations dropped significantly, both in terms of attracting non-resident funds and in foreign investment. The Russian economy s net accepted liabilities declined to $2.2 billion in January-June 2014 from $105.3 billion in the first half of 2013 (due to a reduction in banking sector liabilities by $7.6 billion in Q2). The net acquisition of assets totalled $66.0 billion, falling by almost two times compared with the same period in 2013, with Q2 accounting for only $14.8 billion of this amount. As a result, the net outflow of private sector capital significantly accelerated to $71.7 billion ($33.5 billion in January-June ). The bulk of the capital outflow occurred in Q1, especially in March, the period of the greatest uncertainty connected with the situation in Ukraine. The figure for this month was almost $35 billion. The capital outflow was largely internal in nature; a substantial proportion of the outflow was caused by a surge in demand for foreign cash both from 1 Excluding the impact of FX swap operations with the Bank of Russia and the foreign currency account balances of credit institutions held with the Bank of Russia. 11

14 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 households and in the banking sector: in Q1 alone residents investments in foreign currency totalled about $20 billion. International reserves included in the balance of payments fell by $37.7 billion in January-June Taking into account the currency and market revaluations, as well as other changes, compared with the start of the year the Russian Federation s international reserves dropped by $31.3 billion to $478.3 billion as of 1 July Domestic conditions: economic growth and inflation In 2014, the Russian economy saw lower economic growth rates than those forecasted in the baseline scenario in the Guidelines for the Single State Monetary Policy in 2014 and for 2015 and 2016 (2%). In Q1 and Q2 2014, GDP growth rates were 0.9% and 0.8% respectively compared with the corresponding period the year before. The heightened uncertainty over the Russian economy s growth prospects led to a fall in investment demand alongside a significant increase in capital outflow from the domestic financial market. Fixed capital investment in January-August 2014 dropped compared with the corresponding period in 2013 by 2.5% (by 0.4% in January- August 2013). In the first half of 2014, the contribution of gross capital formation to GDP growth was negative, according to estimates. The contraction of investment demand decreased construction volumes (except residential construction) and suppressed output in manufacturing investment-oriented industries. At the same time, the impact of the fall in the ruble exchange rate from the end of 2013 to early 2014 and changes in the external economic climate on aggregate demand components varied. The growth in uncertainty and ruble depreciation led to a temporary fall in households propensity to organised savings and a rise in demand for durable goods, which supported an increase in the output of goods to satisfy consumer demand in March-May. Household demand for real estate also saw growth. Overall, household final consumption expenditure continued to be a main source of economic growth, however the growth rates of this expenditure dropped amid the slowdown in real incomes and retail lending. In January- August 2014, household consumer spending rose by 2.0% (5.4% in January-August 2013). The ruble depreciation led to an increase in the ruble profitability of exports and exports price competitiveness. The rise in prices for imported products and limited demand reduced import quantities, which, amid growing exports, ensured positive contribution to the Russian economic growth from net exports of goods and services. In the first half of 2014, GDP growth was mainly supported by an increase in gross value added in manufacturing, as well as in mediatory services sector (operations with real estate, financial services), while the contribution of construction, transport, and wholesale trade was small or negative. At the same time, in 2014, as during several previous years, structural factors continued to have a restraining effect on economic growth. The weakening of economic activity was accompanied by a long-term trend of reducing labour supply as a result of demographic factors. In August 2014, the unemployment rate reached its record lows: 4.8% (5.1% seasonally-adjusted). In the first half of the year, there were observed other signs of a growing labour force deficit (part-time employment fell and the number of hours worked per one employee increased) which, given the high production capacity utilisation, points to limited opportunities for non-inflationary growth without increasing labour productivity and modernisation of production. 12

15 Russia s economic development and monetary policy in 2014 According to estimates, this year GDP can increase by 0.4% (it grew by 1.3% in 2013). The slowdown in economic growth in the first half of 2014 was largely structural in nature. The negative output gap amid the low potential output level was comparatively small ( %). As a result, the downward pressure on inflation from aggregate demand was small, and consumer price growth rates remained at an increased level. These dynamics were shaped by a number of factors. The ruble depreciation caused accelerated growth in prices for a wide range of goods and services. However, it is important to understand the reasons underlying the ruble depreciation. To a large degree, it was due to external factors: the curtailment of the Fed s quantitative easing measures and growing uncertainty coupled by the geopolitical tension. Against this backdrop, the increase in the Bank of Russia s key rate contributed to the stabilisation of the FX market and a decrease in inflation expectations and inflationary pressure. Besides exchange rate dynamics, there were other temporary pro-inflationary factors observed in certain food markets. These included low crop yields for certain types of vegetables in 2013, the increase in global prices for certain types of food products and agricultural raw materials, and measures designed to protect Russian markets from inferior imported agricultural products. The annual growth rate of food prices reached 9.8% in June, compared with 6.5% in January. Consumer prices growth in June reached its highest value since the start of the year: 7.8% relative to the corresponding period the year before. In July 2014, annual inflation fell to 7.5%, which was largely caused by the fact that the planned increase of administered prices and tariffs for utility services was smaller than in There was a distinct slowdown in the growth of housing and utility services prices (their contribution to the year-on-year inflation dropped to 0.6 percentage points; in July 2013, it was 1 percentage point). However, in July 13

16 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 inflation decreased more slowly than had been forecasted, which called for a further increase in the Bank of Russia s key rate. In August, annual growth in consumer prices again accelerated to 7.6%, which was to some degree due to the import restrictions on a number of food goods. Amid accelerating price growth for certain food items included in the calculation of core inflation and price growth rates for non-food goods that remained at elevated levels, core inflation rose to 8.0% in August. According to estimates, by the end of 2014, inflation will exceed 7%. The Bank of Russia s monetary policy can ensure that it will reach the 4% target in the medium term despite the increase in inflation in the second half of 2014, as this change is linked to temporary factors. Financial conditions Interest rates In 2014, the Bank of Russia implemented its monetary policy by steering short-term money market rates: over the entire period overnight interbank lending rates were predominantly within the Bank of Russia interest rate corridor (the key rate ±1 percentage point). On the whole, money market rate dynamics were primarily shaped by changes in rates for Bank of Russia operations: after each increase in the Bank of Russia key rate (in March, April and July) there was a corresponding rise in money market rates. With the persisting structural liquidity deficit, money market rates in January- July 2014 were predominantly in the upper half of the Bank of Russia s interest rate corridor. In August-September 2014, the average level of overnight interbank lending rates was close 14

17 Russia s economic development and monetary policy in 2014 to the Bank of Russia key rate, which was conditioned by a change in the situation in the FX swap operations segment. The Bank of Russia s monetary policy decisions impacted government and corporate bond yields. Other factors also affected the situation in the bond market; these factors were primarily linked to the uncertainty of the external economic situation: the dynamics of crossborder capital flows, announcements about the introduction of sectoral sanctions against Russia, geopolitical risks, and revision of sovereign and corporate credit ratings. In 2014, growth in rates was also observed in the bank lending and deposit operations segment, linked both to the increase in the Bank of Russia key rate and restricted access and higher cost of foreign lending, as well as growing credit risks associated with a potential rise in overdue loans. As such, the change in rates for operations with various maturities differed. In July 2014, the long-term household deposit rate was 7.8% p.a., 41 basis points higher compared with December 2013; and short-term deposit rate was 6.2% p.a., remaining almost unchanged compared with the end of Lending rates in 2014 grew faster than deposit rates. In January-July 2014, rates for short-term loans to non-financial organisations increased by 132 basis points, and for longterm loans by 128 basis points (to 10.7% and 11.9% p.a. respectively). Bank lending Amid the fall in economic growth rates and the increase in the debt burden on borrowers, banks raised their requirements to the financial standing of borrowers and the quality of collateral. Coupled with the increase in interest rates and weakened demand for loans as a result of the downturn in economic growth, this caused a slowdown in the growth of banks loan portfolios. At the same time, tighter requirements to borrowers helped keep in check the impairment of loan portfolios. The share of overdue debt in total loans provided to non-financial organisations was 4.5% as of 1 September 2014 (compared with 4.2% at the start of the year). The corresponding indicator in the household lending segment rose from 4.4% to 5.6%. In 2014, the slowdown in consumer lending growth rates witnessed in previous years continued, due to the macro-prudential measures implemented by the Bank of Russia to contain growth in unsecured consumer lending and to the revaluation of household lending risks by banks. This slowdown was in part offset by accelerated growth in mortgage lending, but household lending growth mainly slowed to 18.2% as of 1 September 2014, which is 10.5 percentage points lower than the corresponding indicator at the start of In the non-financial organisation lending segment, Q1 saw a small increase in annual lending growth rates, but this was predominantly down to the expansion of lending to nonresident organisations and the revaluation of foreign currency loans. In Q2, the growth in lending to non-financial organisations slowed somewhat. Money supply and its sources Decrease in credit growth within the economy, which is the main source of money supply, led to a slowdown in the growth of 15

18 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 monetary aggregates. In addition to this, another contributing factor was change in the external sector balance, which was manifested as a reduction in the Bank of Russia s net foreign assets as a result of foreign exchange interventions in January-April 2014 not offset by growth in credit institutions net foreign assets. Moreover, in 2014, balances in budget accounts with the Bank of Russia grew faster than in the previous year, as a result of which net claims of banking system on the general government reduced. Consequently, on 1 August 2014, the annual growth rate of broad money (M2X aggregate) was 9.0% versus 15.7% on 1 January 2014 and 17.5% on 1 August The slowdown of money supply growth rates was accompanied by a change in its structure. Amid economic uncertainty and the nominal depreciation of the ruble at the start of 2014, one could observe an outflow of depositors funds from banks and deposits transfer from ruble into foreign currency. As a result, the dollarisation of household deposits, included in money supply, rose from 19.4% on 1 January 2014 to 23.8% on 1 April 2014, and the dollarisation of corporate deposits over the same period increased from 22.2% to 28.0%. From April, the inflow of depositors funds to Russian banks recovered, with the growth in funds in ruble deposits exceeding the growth in funds in foreign currency deposits, which contributed to a steady decline in the level of deposit dollarisation. Under these circumstances, the annual growth in the M2 aggregate fell from 14.6% on 1 January 2014 to 6.2% on 1 August 2014, dropping to its lowest value since Exchange rate In the period from January to July 2014, the ruble depreciated against major world currencies, and in some periods ruble exchange rate dynamics were affected both by factors common to all emerging market currencies and by specific factors linked to the growing geopolitical risks to Russia. In Q1 2014, the increasing uncertainty over developments in the situation in Ukraine and its effects for the Russian economy, the imposition of sanctions against Russia by a number of countries and the subsequent decrease in Russia s sovereign credit rating by Standard & Poor s led to the 16

19 Russia s economic development and monetary policy in 2014 ruble depreciation against the majority of world currencies. In Q2 2014, as the situation started to stabilise in the domestic FX market, the ruble strengthened its position, after which its exchange rate volatility remained moderate until the end of the period under consideration. On 1 August 2014, the value of the dual currency basket was rubles, up by 6.9% compared with the start of the year. In June 2014, the ruble nominal effective exchange rate against the currencies of Russia s main trading partners fell by 1% compared with December II.2. Use of monetary policy instruments The Bank of Russia implements its monetary policy by steering interest rates. At the same time, looking forward to limit its impact on market pricing mechanisms, the central bank exerts a direct influence only on the most shortterm segment: overnight money market rates. Other interest rates in the economy, including bank lending and deposit rates, bond yields and other financial market rates, are shaped by market mechanisms, however a change in money market rates can have a major impact on the dynamics of other rates. This ensures the transmission of monetary policy decisions on the economy as a whole. The process of implementing monetary policy consists of two stages. The first is setting money market rates consistent with inflation targets, based on macroeconomic forecasts. The Bank of Russia sets the key rate as a benchmark for money market rates. The second is establishment of a system of instruments and conduct of operations in a way that ensures money market rates being close to the key rate. The core of the Bank of Russia s system of instruments is the interest rate corridor, which limits the range of market rate fluctuations around the key rate. The bounds of this corridor are set by the interest rates on one-day standing facility liquidity provision and absorption operations. The key rate representing the centre of the corridor is the interest rate on the Bank of Russia s one-week auction-based operations. By providing or absorbing liquidity at auctions at a rate close to the key rate, the Bank of Russia strives to ensure that money market rates are 17

20 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 close to the centre of the interest rate corridor. The amount of auction-based operations is determined by the forecast of liquidity supply and demand. The key indicator of the Bank of Russia s monetary policy stance is the key rate level. The Bank of Russia does not loosen or tighten its policy by changing the volume of its operations. The choice of monetary policy instrument is based on the banking sector liquidity situation. In January-August 2014, the banking sector structural liquidity growth deficit continued. As expected, one of the key channels of liquidity drain during this period was an increase in general government account balances with the Bank of Russia, which was in part offset by an increase in Federal Treasury funds held in deposits with credit institutions, while an inflow of liquidity came from the withdrawal of cash from circulation. Amid the sharp depreciation of the Russian currency in March 2014, the Bank of Russia sold immense volumes of foreign currency in the domestic FX market within the existing exchange rate policy framework in order to support financial stability. In January- July 2014, the total volume of these operations reached 1.5 trillion rubles; they totalled 1 trillion rubles in March alone. Sudden growth in demand for refinancing in March, stipulated by these foreign exchange interventions, led to an increase in the credit institutions outstanding amount of refinancing operations by 1.1 trillion rubles. According to Bank of Russia estimates at the start of the year, this level was not expected until October By the start of September 2014, this debt had reached 5.2 trillion rubles. The increase in the amount of funds provided offset the outflow of liquidity through the foreign exchange channel and did not indicate a loosening of the Bank of Russia s monetary policy. These operations mainly changed the structure of the Bank of Russia s assets, bringing about a rise in the share of banking sector outstanding amount on refinancing operations and a decline in the share of foreign currency assets. The bulk of demand for refinancing was satisfied through one-week repo operations, supplemented by fine-tuning repo auctions if required. This instrument was introduced by the Bank of Russia in February 2014 at the same time as the daily one-day repo auctions were 18

21 Russia s economic development and monetary policy in 2014 abandoned. These operations are only employed in order to offset short-term substantial changes in banking sector liquidity, which means that they are irregular in nature. On average, over the period under consideration, credit institutions outstanding amount due to the Bank of Russia on repo auctions was 2.6 trillion rubles, with its maximum reaching 3.3 trillion rubles. Seeking to satisfy banking sector growing demand for refinancing operations in view of the limited marketable collateral, the Bank of Russia was forced to employ more extensively operations involving other types of assets. It increased the supply and the frequency of auctions to provide 3-month loans secured by non-marketable assets. As a result, on 1 September 2014, credit institutions outstanding amount on this type of operation reached 2.0 trillion rubles, which made it possible to keep outstanding amounts on repos at a level which allowed the Bank of Russia to steer money market rates. To reduce the effect of the growing volume of refinancing operations on the gap between the maturity of assets and liabilities in credit institutions balance sheets, in July 2014, as in the previous year, the Bank of Russia held a 12-month loan auction. In June 2014, the maximum term of standing facilities to provide funds (loans secured by non-marketable assets, guarantees or gold) was increased from 365 to 549 days. This measure will allow credit institutions, if necessary, to reduce the share of the Bank of Russia s short-term operations in their liabilities. The supply of funds at Bank of Russia auctions was sufficient to satisfy credit institutions demand for liquidity. This was confirmed by the low volume of fixed-term refinancing operations, mainly presented by FX swap operations. Amid the increase in banking sector demand for liquidity and the continuing problems with certain credit institutions collateral shortage, money market rates were mostly in the upper half of the Bank of Russia s interest rate corridor. On average, the spread between the money market rate (MIACR) and the Bank of Russia key rate was 0.55 percentage points over the period under consideration. Short periods where money market rates exceeded the bounds of the Bank of Russia interest rate corridor in certain months did not pose any significant risks to the 19

22 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 transmission mechanism of monetary policy and were provoked by a short-term increase in demand for liquidity, in particular from certain credit institutions. To improve the Russian economy s access to long-term funding sources, in the first half of 2014, the Bank of Russia introduced a mechanism to refinance loans for investment projects 2 with terms up to 3 years. The collateral for this type of operation includes claims on loans for investment project financing selected in line with the procedure set out by the Government of the Russian Federation, as well as bonds which are placed to fund investment projects and which are included in the Bank of Russia Lombard List. From July 2014, the rate on these operations was set at the Bank of Russia key rate less 1 percentage point (7% p.a.). This programme is not included in the Bank of Russia s monetary policy instruments framework. The provision of funds to participant banks at an interest rate below the Bank of Russia key rate for longer terms than under standard instruments offers 2 Press release dated 25 April 2014 On Refinancing Investment Project Loans and dated 29 May 2014 On Supplementing Refinancing Mechanism for Investment Project Loans. additional incentives to finance investment projects, thereby fostering the development of this segment of the credit market. II.3. Exchange rate policy of the Bank of Russia In January-August 2014, the Bank of Russia continued its exchange rate policy within the managed floating exchange rate by not setting fixed limits on the ruble exchange rate or target values for its changes. As in 2013, the Bank of Russia used the ruble value of the dual currency basket as an operational benchmark (0.55 US dollars and 0.45 euros); the range of its permitted values was set by the floating operational band. The width of the band was 7 rubles until 18 August 2014; and on that day, the Bank of Russia symmetrically expanded the operational band to 9 rubles. The exchange rate policy mechanism allowed the Bank of Russia to buy and sell foreign currency, while the value of the dual currency basket remained within the operational band; this band had a designated neutral range where no foreign exchange interventions aimed 20

23 Russia s economic development and monetary policy in 2014 at smoothing out volatility in the ruble exchange rate were carried out. The operational band borders were automatically adjusted whenever the Bank of Russia s cumulative operations reached the required amount (for the purposes of which, the amount of target purchases and sales of foreign currency were not taken into account). With the prevalence of the ruble depreciating trends against the main global currencies, in 2014, the Bank of Russia carried out largescale foreign exchange interventions aimed at smoothing fluctuations in the ruble exchange rate. In January-July 2014, net sales of foreign currency by the Bank of Russia amounted to $40.9 billion, of which $11.3 billion were sold on 3 March 2014, when there was a sharp increase in demand for foreign currency. As a result, during the period under review, the lower and upper borders of the operational band were adjusted by more than 3 rubles to and rubles respectively. The restrictions enforced by certain countries on access to foreign financial markets for a number of Russian organisations were an additional factor in the increased tension in the domestic FX market and contributed to deterioration in the banking sector s ability to manage short-term foreign exchange liquidity. To mitigate these negative effects, from 17 September 2014, the Bank of Russia introduced USD/RUB buy/sell FX swaps. This new instrument enabled the Bank of Russia to conclude overnight FX swap deals with today/ tomorrow and tomorrow/day-after-tomorrow settlements in the corresponding trading segment at the Moscow Exchange. Taking into account the auxiliary nature of these operations, the Bank of Russia limited the volume of deals with today/tomorrow and tomorrow/dayafter-tomorrow settlements to 1 and 2 billion US dollars respectively. The interest rates on these operations were fixed at 7.00% p.a. for the ruble leg and at 1.50% p.a. for the foreign currency leg. The supply of foreign currency by the Bank of Russia is temporary and is aimed at reducing the risk of disturbing the stable functioning of the domestic financial market. In the period from 20 February to 20 June 2014, the Bank of Russia also adjusted the volume of operations in the domestic FX market in connection with the transfer of foreign 21

24 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 currency funds equivalent to billion rubles to the Reserve Fund at the end of This sovereign fund was replenished by the Federal Treasury s foreign currency purchases totalling an equivalent of 3.5 billion rubles per day. The instability of the domestic FX market caused the suspension of these operations by the Russian Ministry of Finance in the period from 4 March to 14 April On 13 January 2014, as part of measures to further increase the flexibility of the exchange rate mechanism, the Bank of Russia reduced the volume of targeted foreign exchange interventions from $60 million per day to zero and the cumulative volume of interventions triggering a 5-kopeck shift in the operational band borders from $400 to $350 million. From 3 March 2014, due to the aggravation of the external political situation provoking a sharp ruble depreciation, which could pose a threat to the stability of domestic financial markets, the Bank of Russia increased the cumulative volume of interventions to $1.5 billion to stabilise the domestic FX market. Other parameters of the exchange rate policy mechanism remained unchanged. The temporary drop in the flexibility of the ruble allowed the Bank of Russia to stabilise the situation in the domestic FX market, as a result of which devaluation expectations in the economy fell and no significant increase in the dollarisation of deposits occurred. In addition, this measure mitigated the inflationary after-effects of the ruble depreciation. As the volatility in the domestic FX market waned, the Bank of Russia continued to gradually increase the flexibility of its ruble exchange rate mechanism and decreased the volume of interventions aimed at smoothing the ruble volatility in the internal ranges of the operational band by a total of $200 million on 22 May and 17 June As a result of these adjustments within the floating operational band, the range where the Bank of Russia does not implement the FX interventions to smooth the volatility of the national currency was increased from 3.1 to 5.1 rubles (with consideration of the technical range). Moreover, on 17 June 2014, the Bank of Russia decreased the cumulative volume of interventions triggering a 5-kopeck shift in the operational band borders to $1 billion. Starting 18 August 2014, the Bank of Russia expanded the floating operational band from 7 to 9 rubles, set the volumes of foreign exchange interventions aimed at smoothing ruble exchange rate fluctuations in the internal ranges of the operational band at zero level, and decreased the cumulative volume of foreign exchange interventions to $350 million. As a result of these adjustments, the Bank of Russia abandons foreign exchange interventions aimed at smoothing the volatility of the national currency exchange rate when the value of the dual currency basket is within the operational band. As before, when the value of the dual currency basket reaches the borders of the operational band, the Bank of Russia carries out unlimited interventions until the value of the dual currency basket returns within the floating operational band as a result of changes in the ruble/us dollar/euro exchange rate, or the borders of the operational band are shifted in accordance with the rule. 22

25 III. Macroeconomic development scenarios and monetary policy in The Russian economy development over the forthcoming three-year period will be characterised by high levels of uncertainty. Primarily, this is due to external factors that include possible changes in the geopolitical situation, uncertainty about the duration of mutual sanctions and the scale of their influence on the Russian economy. Aside from this specific factor, significant uncertainty remains in the dynamics of prices for oil and other energy resources, which have always been important to Russia, as well as in future monetary policy in the largest advanced countries, that will determine the external financial conditions for Russia. The prospects for economic growth in the medium term will be determined by the speed and consistency of the essential structural reforms and the ability of the economy to overcome domestic infrastructure and resource constraints, including those related to unfavourable demographic trends. The recovery of investment activity, that will create the necessary conditions for increased economic productivity and efficiency in certain industries and markets, should make an important contribution to ensuring stable growth. The key condition in terms of overcoming the fall in investments is reducing economic uncertainty and improving the business climate. Under these conditions, the Bank of Russia s objective is to guarantee price and financial stability, which will support economic growth. Along with the implementation of the inflation targeting regime, the Bank of Russia will work to create clear inflation benchmarks for the economy. Monetary policy decisions aimed at achieving inflation targets will be taken on the basis of the assessments of the current state of the economy and its medium-term development forecast, taking into account existing external and internal risks which could have a significant impact on the financial system and economy as a whole. An important channel to smooth out the impact of negative external trends on domestic economy is the possibility of a change in the value of ruble in line with the dynamics of exchange rate fundamentals under the floating exchange rate system. The Bank of Russia has considered three scenarios for the development of the Russian economy in the period (variants I, II and III) that establish different conditions for monetary policy. The scenarios differ in their assumptions regarding external economic development and take into account, among other things, potential changes in the parameters of the mutual sanctions introduced in 2014, external financial conditions, and global energy prices, which shape the dynamics of terms of trade. With regard to internal conditions, all variants assume inertial growth in the Russian 23

26 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 economy over the next three years. At the same time, assumptions related to fiscal policy measures adopted by the government differ. Variant I, which is the baseline scenario, assumes the gradual recovery of the global economy, a slight fall in oil prices, as well as the resolution of geopolitical problems and the lifting of the majority of mutual sanctions introduced in 2014 during This variant does not imply any increase in the tax burden on the economy. Variant II differs from variant I in the assumption that the geopolitical situation will deteriorate, the sanctions will be in force longer, and the tax burden on the economy will increase. Variant III assumes the most negative external and internal conditions from a monetary policy perspective, including stagnation of foreign demand and a significant deterioration in the terms of trade. The Bank of Russia chooses its monetary policy parameters to ensure that inflation slows to its target without posing any risks to stable economic growth. When making its decisions, the Bank of Russia is guided by a wide array of indicators reflecting inflationary pressure in the economy, primarily driven by economic activity and monetary conditions. The baseline scenario (variant I), which is the most probable, according to Bank of Russia estimates, assumes that the geopolitical risks will remain at a heightened level in the first half of 2015 and will gradually diminish over time. The impact of the sanctions already enforced, including the restricted access to foreign financial markets for Russian companies, will be prolonged. This factor will limit economic growth in 2015, primarily affecting investment activity. Foreign economic activity will normalise gradually. It is expected that the growth rate of the world economy will increase during the next few years. At the same time, the economic growth prospects of a number of Russia s trading partners have worsened in the past few months, in connection with the fall in economic activity observed in Europe and the CIS countries. It is assumed that growth in external demand will remain at a level not sufficiently high to have a significant stimulating effect on the economic growth in Russia. As the global economy recovers in the near future, the central banks of advanced countries will move towards consistent normalisation of monetary policy (in the USA already in the middle of 2015), which will lead to gradual interest rate increases in foreign markets. The policy stance of the ECB, in contrast, will continue to be markedly accommodative at least in The increase in the cost of borrowing, restricted access to foreign financing and the continued high risk premiums for Russia will all be factors limiting economic growth in 2015, although the gradual normalisation of the situation is expected in the future. Moderate downward oil price dynamics in the global markets are forecasted to continue in The negative trend (from $106.5 per barrel on average from early 2014 to $102.5 per barrel on average in 2017) will be caused by faster expansion of global supply compared with global demand alongside sufficiently profitable oil extraction from unconventional sources. The increase in the global oil supply will be a consequence of the increase in its extraction from unconventional sources in North and Latin America and growth in exports from the Middle East. An increase in demand for oil will be constrained by the slowdown in economic growth in the largest oil importers (China, euro area), the introduction of energysaving technology, and the move towards other forms of energy. Likewise, there is not expected to be any appreciable improvement in the price situation in other segments of global commodity markets, including other energy commodities and metals. A structural slowdown in the growth of the largest emerging market economies (including China) will curb the demand for energy commodities and metals. Persistent 24

27 Macroeconomic development scenarios and monetary policy in medium-term deterioration in the terms of trade will be caused by a fall in oil prices and the expected absence of a rise in the prices of other significant commodities exported by Russia, along with more expensive Russian imports. This factor will be constraining potential output growth rate and economic activity in Russia. The fiscal policy implemented under budget rules will make a minor positive contribution to the aggregate demand over the coming years, also partially compensating the negative effect of external conditions on the economy and accordingly maintaining a countercyclical effect. At the same time, no additional significant changes to fiscal policy are expected under the baseline scenario, including increases to the tax burden or changes to tariff policy. In addition to the fiscal policy effects, the internal conditions would be affected by the Bank of Russia monetary policy, focused on ensuring the price stability. The conditions for a consistent slowdown in inflation will be supported by predicted moderate growth in consumer demand, stable exchange rate dynamics, and suggested reduction of inflation expectations, accompanied by moderately tight monetary policy and the spillover effect of the slowdown in monetary and credit aggregate growth which took place in It is expected that after remaining high in 2014, inflation will undergo a significant downturn in The slowdown in inflation will take place as the impact from the shock of prices for certain groups of food goods following the import restrictions introduced in 2014 wanes; after these restrictions are removed (in 2015 Q3) compensatory growth in supply is expected from those importers formerly leaving the market, along with a significant slowdown in price growth for corresponding product groups. To limit the impact of acceleration in food prices on a wide range of goods and services and inflation expectations, the Bank of Russia will maintain a moderately tight monetary policy in the first half of 2015 in order to achieve its inflation targets in the medium term. As the situation begins to stabilise and inflation expectations subsequently fall, the Bank of Russia will consider the possibility to loosen its policy. With the marked trend of falling inflation expectations, inflation could reach its target path with a looser monetary policy. Taking all factors into account, a gradual convergence of inflation to target path is expected: according to the baseline scenario, forecasts suggest that inflation will be % at the end of 2015, and % in 2016 and 2017, respectively (see Annex Macroeconomic Development Scenarios). The fall in external economic uncertainty, slowdown in inflation and stabilisation of inflation expectations under the Bank of Russia s inflation targeting policy will establish conditions for a consistent drop in medium- and long-term nominal market interest rates and an extension of loan maturities. In view of the likely external and internal developments of the Russian economy, its low growth is expected to continue in A gradual recovery in economic activity is predicted after the lifting of sanctions and restoration of access for Russian finance and non-finance companies to world capital markets expected at the end of The gradual acceleration of GDP growth in the medium term will ensure that aggregate output is close to potential levels while closing the negative output gap which was formed predominantly as a result of external economic factors. GDP growth will be % in 2015 and will increase to % and % in 2016 and 2017 respectively. Domestic demand in will continue to be the main driver of GDP growth. As the external political situation normalises, economic uncertainty falls, foreign financial conditions temper, inflation slows and the confidence of economic agents improves, investment activity will start to recover. The 25

28 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 planned measures for financing infrastructure projects through the National Wealth Fund, the use of the Bank of Russia s refinancing instruments aimed at stimulating lending of long-term investments, as well as the start of a large gas export project in the framework of longterm cooperation with China should also provide support for the recovery of investment growth. It is expected that fixed capital investment growth rate will be positive in In , forecasts suggest that investment activity will show further revival. It is expected that the fixed capital investment growth will be % in 2015 and % in The growth in consumer demand is expected to slow down in 2015, along with a reduction in wage amid fairly weak economic activity. Retail lending dynamics will also have a restraining influence on consumer demand. In , a gradual increase in business activity will facilitate a recovery of consumer demand. Its dynamics will be supported by moderate growth in the aggregate earnings of economic agents, which will accelerate slightly in line with economic activity revival in and the decrease in inflation in the context of stable credit supply. Taking into account the workforce scarcity and structural specifics of the Russian labour market, it is expected that the market will adapt to any changes in economic activity primarily at the expense of wage changes while maintaining a relatively stable unemployment rate (4.5 5%). The growth of consumer demand will be % in 2015, and % in 2016 and It is projected that in 2015 net exports will make a negligible contribution to GDP growth, with a low growth in imports amid comparatively weak consumer and investment demand. Furthermore, the restrictions on the imports of certain food products introduced in August 2014, accompanied by price growth in the relevant segments of the food market, will be conducive for import substitution resulting in a larger share of consumer demand for food products being satisfied from domestic sources. In , a recovery of investment and consumer demand will lead to an increase in import growth that, with limited potential for export growth, will result in a small negative contribution of net exports to GDP growth. In , the annual exports and imports growth rates will be about % and % respectively. These goods and services export and import growth, as well as the expected worsening of the terms of trade will cause a gradual reduction in Russia s current balance of payments surplus from more than 2% of GDP in 2014 to around 1% of GPD in (see Annex Macroeconomic Development Scenarios). In the absence of Bank of Russia operations in the domestic FX market, a corresponding change in the financial account balance will ensure symmetry in the balance of payments. While external sanctions are limiting access to foreign financial markets for certain large companies and are causing deterioration in external financing conditions for numerous Russian borrowers, there is expected to be a downward trend in external debt. At the same time, there is expected to be a fall (relative to previous years) in demand for foreign assets in view of household income dynamics, the ruble exchange rate, differences between foreign and domestic interest rates and investors evaluations of external and internal risks. Growth in demand for money and credit will be slightly lower than in previous years, which is in line with the predicted economic activity and inflation dynamics. The annual growth rates of money supply (monetary aggregate M2) will be 9 12%. Lending to the economy will be the main source of growth in broad monetary aggregates, and will be increasing at comparable rates. Maintaining a stable situation in the domestic foreign exchange market and implementing the predictable monetary policy will create the 26

29 Macroeconomic development scenarios and monetary policy in conditions for a fall in the dollarisation of the economy. Given the transition to the floating exchange rate regime and the implementation of the fiscal policy under budget rules, there will be a consistent fall in the impact of foreign exchange and fiscal channels on the shaping of money supply over the forthcoming three years. Money supply from monetary authorities will be largely shaped by the Bank of Russia s refinancing operations with credit institutions; in view of the above, moderate growth is expected in the Bank of Russia s gross lending to banks (see Section IV and Annex Macroeconomic Development Scenarios). The Bank of Russia expects that the risks to financial stability in the baseline scenario will be moderate and it will not be necessary to introduce special measures to support the financial sector. It is important to note that the Bank of Russia s baseline scenario is, broadly speaking, close (in terms of the key assumptions and expected paths of changes in key macroeconomic variables) to the socio-economic development forecast for the Russian Federation for developed by the Russian Ministry of Economic Development (variant I). Variant II assumes external oil demand and price dynamics similar to the baseline scenario, but considers the possibility of continued elevated external political tension across the entire period under consideration, including the prolonged enforcement of mutual sanctions and restrictions. In this variant, capital outflow is expected to be higher compared with the baseline scenario, and will be accompanied by corresponding exchange rate dynamics. On the one hand, a change in the ruble value will partially offset the negative impact of external conditions, supporting economic activity through a change in net exports; however, it will also lead to an increase in inflationary pressure. Currently discussed introduction in 2015 of the sales tax is another inflation factor in this scenario. The implementation of these measures will lead to a one-time significant acceleration in inflation, which could shape growth in inflation expectations. Against this backdrop, in , inflation will be above target values. The Bank of Russia will determine its monetary policy parameters taking into account the specific impact of the factors mentioned above on the economic development and inflation dynamics, including by considering the effective duration of these factors, the nature of the impact on supply and demand, and the expectations of economic agents. Given the existence of a number of inflationary factors along with the continuation of a moderately tight monetary policy stance, a gradual fall in inflation to the medium term target path, which will however take a longer period than in the baseline scenario, is expected. Temporary monetary factors will cause inflation targets to be exceeded. In view of the deterioration in economic growth prospects in 2014, the Bank of Russia will seek to reduce inflation gradually, without generating a risk of an excessive slowdown in economic activity. In this scenario, forecasts put inflation at 6 6.5% in 2015, and % and % in 2016 and 2017 respectively. At the same time, GDP growth is likely to increase gradually, remaining below baseline scenario indicators, reaching % in 2015, % and % in 2016 and 2017 respectively. If this scenario is realised, the Bank of Russia will pay greater attention to supporting financial stability. Should any signs arise pointing to a destabilisation of the situation in the financial sector the Bank of Russia will be ready to apply additional instruments according to the extent of the risks. The possible instruments include foreign exchange interventions to stabilise the situation in the domestic FX market, foreign exchange refinancing, and unsecured loans. Variant III is based on assumptions similar to variant II (including the prolonged effect of 27

30 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 sanctions, as well as fiscal policy parameters), but suggests a simultaneous fall in oil prices by over $20 per barrel for The factors behind such a fall could include weaker growth rates in the global economy (in particular, in emerging markets, primarily China) and a dynamic increase in oil exports from the USA and the Middle East. Under this scenario, fiscal policy, based on budget rules and assuming the option of using Reserve Fund to play a stabilising role, will make a more pronounced positive contribution to aggregate demand dynamics. At the same time, the stimulating effect of fiscal policy will not fully offset the restraining impact from the deterioration in the external conditions. A certain depreciation of the ruble can also lessen the impact of changes in external conditions on economic activity, supporting competitiveness among Russian producers and assisting in import substitution; however, to bring about this effect in full, a relatively long period of time is required. All the while, such dynamics in the ruble exchange rate will lead to inflation acceleration. On the whole, the restraining impact on the Russian economy exerted by a change in external trade conditions and financial activity will have larger scale and will be more persistent than in scenarios I and II. Monetary policy will be steered in such a way that it contains inflation and avoids the excessive cooling of the economy. Taking into account the accommodative fiscal policy and flexible exchange rate mechanism, which will prevent a serious slowdown in economic growth and a broadening of the negative output gap, maintaining a moderately tight monetary policy stance will support economic agents confidence in the national currency and prevent an outflow of funds from ruble-denominated deposits and an increase in inflation expectations. It is expected that the balance of external and internal factors will lead to a slowdown in economic growth to below 1% over the three-year period under consideration. The Bank of Russia s main objective is to ensure financial stability, prevent a fall in confidence in the national financial system and the national currency, and stop any increase in economic uncertainty, hampering the recovery of stable growth in the economy. The Bank of Russia will be ready to apply a broad spectrum of instruments to support the stable functioning of the financial system. * * * In all of these scenarios, there is the possibility of further risks which can affect inflation dynamics and monetary policy conditions. In particular, price hikes for certain food goods traditionally characterised by their high volatility pose risks to the achievement of inflation targets. Short-term changes in such prices can be determined by supply-side factors in the domestic or global market depending on results of the agricultural year (certain crop harvests). Potential changes in government tariffs and fiscal policy can also have a significant impact on price dynamics. Acceleration in annual inflation rates under the influence of the factors mentioned above is, as a rule, short-term, i.e. as the effect of these factors wanes after one or one-anda-half years, inflation will slow accordingly. In this case, the inflation rate will return to a path in line with achieving the targets in the medium term, without any further changes in monetary policy stance. At the same time, it is important to take into account the impact of such factors on a wide range of price indicators and inflation expectations; should they increase, the acceleration of inflation could be more prolonged and stable. If these one-time factors take hold, the Bank of Russia will decide on the expediency of changing its monetary policy stance, taking into account the risks posed to achieving its medium-term inflation targets, also considering that an increase in the volatility of financial and economic indicators would not be desirable. 28

31 Macroeconomic development scenarios and monetary policy in A more substantial fall in oil prices could pose a significant risk, which, if it occurs, could have a significant impact on the economic situation and the conditions under which the monetary policy is implemented. In this case, on the one hand, there will be acceleration in ruble depreciation, and on the other hand, a significant decrease in economic activity, even going as far as negative growth in the economy. If a negative long-term trend in oil prices develops, the slowdown of domestic economic growth will also bear a structural character. In these conditions, stimulation of economic activity using monetary policy measures could turn out to be unproductive. Another factor which could intensify, in view of the expanded effect of formal and informal restrictions on access of the Russian corporate sector to external financial markets, or could be an extended consequence of the aforementioned scenario of a fall in oil prices, is the intensification of the capital outflow from the Russian economy. The escalated repayment of companies and banks external debt and the maintenance of the private sector capital outflow in the coming years at a level comparable with 2014 will lead to a more pronounced decline in economic activity (as a result of the fall in investment and consumer demand in the context of profits and other income contraction). An intensification of the risks posed to price and financial stability will also be seen at the same time, primarily due to the ruble depreciation and the deterioration in confidence. Ruble exchange rate could experience decreased sensitivity to changes in domestic interest rates, including the Bank of Russia key rate, which, in the short term, could cause a fall in the effectiveness of monetary policy transmission via this channel and prevent inflation targets from being achieved. In the cases mentioned above, the Bank of Russia s monetary policy will be aimed at ensuring price and financial stability. To guarantee the financial system sustainability, maintain confidence in the system and avoid unfavourable spill-over effects following a change in external conditions, including through economic agents expectations, the Bank of Russia will be prepared to employ a wide spectrum of instruments, including potential operations in the domestic FX market. The monetary policy stance will be based on an analysis of the nature of the slowdown in economic growth, the state of the financial system, the expected effect on exchange rate movement, and the influence of the fall in business activity on consumer prices. Furthermore, the changes in the inflation expectations will be an important factor. If adherence to inflation targeting policy increases confidence in the ability of the Bank of Russia to ensure the achievement of its targets, all things being equal, it will be possible to pursue a looser monetary policy. The Bank of Russia will regularly assess and fine tune the parameters of the macroeconomic development forecast, which could have impact on decision-making in relation to monetary policy implementation to ensure the attainment of the targets. The corresponding information will be presented in the quarterly Monetary Policy Report published by the Bank of Russia. 29

32 IV. Monetary policy instruments in The Bank of Russia sets the key rate on the basis of medium-term macroeconomic forecasts and risk assessments to achieve its inflation targets. The key rate defines the monetary policy stance and acts as a benchmark for overnight money market interest rates. The Bank of Russia endeavours to ensure that money market rates are close to the key rate by setting parameters for its operations. The Bank of Russia s decisions on applying and developing instruments are not directly dependent on the scenario employed to set the key rate, but are based on an analysis and forecast of the banking sector liquidity, as well as the specificities of the Russian money market. In , the structural deficit of banking sector liquidity is expected to increase by trillion rubles 1 per annum. The growth in cash in circulation by an average of trillion rubles will primarily define the demand for refinancing. The Bank of Russia will continue to increase the potential for refinancing through repo operations. The Lombard List will be expanded by including new issues of securities which meet the stipulated criteria. In addition, certain measures implemented by the Bank of Russia to develop the financial market will assist in increasing its capacity. In particular, as part of its mandate, the Bank of Russia will contribute to 1 More in-depth data are provided in the table Monetary Programme Projections the development of securitisation mechanism, which is due to take place with the active involvement of credit institutions. With the forecasted increase in structural liquidity deficit in , the guidelines for monetary policy instruments development will be determined by two key factors. On the one hand, banks demand for refinancing will in all likelihood grow faster than the volume of securities in their portfolios. To reduce the burden on marketable collateral, the Bank of Russia will continue to increase the volume of liquidity it provides by using different types of assets. On the other hand, the growth in credit institutions outstanding amount on refinancing operations could lead to a further increase in the gap between asset and liability maturities. Against this backdrop, the Bank of Russia will seek to limit the impact of the structural liquidity deficit on credit institutions balance sheets. The Bank of Russia will continue to carry out its longer-term refinancing operations secured by non-marketable assets, guarantees and gold. The use of these instruments will enable the Bank of Russia to keep the outstanding amount on main operations at a level at which the Bank of Russia can more effectively steer money market rates. Moreover, these refinancing operations will allow solving the problem linked to the impact of the structural liquidity deficit on the maturity of credit institutions liabilities. 30

33 Monetary policy instruments in Amidst instruments with non-standard terms the Bank of Russia will continue to execute monthly auctions for the provision of 3-month loans at a floating interest rate tied to the key rate. On its discretion, the Bank of Russia can also carry out similar operations with 12-month terms. The maximum quantities provided at loan auctions will be set so that, where possible, it will not allow any sharp fluctuations in banks outstanding amount on such operations. A subsidiary instrument that the Bank of Russia will apply is standing facilities with terms ranging from 2 to 549 days, secured by non-marketable assets, guarantees and gold. In conjunction with the banking community, the Bank of Russia will continue to improve its procedures for longerterm operations. The Bank of Russia intends to supplement its monetary policy instrument system with auction-based gold swap operations using metal accounts (with terms ranging from 1 to 7 days and for 1 day at a fixed interest rate). Currently, the use of gold as collateral on Bank of Russia secured loans assumes its actual delivery. The use of stock exchange technologies in gold swap operations will help increase the convenience of using this type of collateral for credit institutions and raise the potential volume of refinancing. The Bank of Russia will also consider the possibility of auction-based FX swaps with terms ranging from 1 to 7 days, which will be used alongside repos with equivalent terms to steer short-term money market rates. In the event of a sharp rise in tension in the money market and the emergence of a threat to its stable functioning, the Bank of Russia will not rule out the possibility of using unsecured loans. The Bank of Russia will employ this instrument only if the potential for refinancing using standard instruments has been exhausted. If the need arises for unsecured operations, they will be occasional and will only be used until the banking sector raises a sufficient amount of assets that are accepted by the Bank of Russia as collateral. Under the baseline variant of the macroeconomic forecast, the Bank of Russia assesses the likelihood of employing this instrument in the forthcoming three-year period as minimal. Alongside refinancing operations and liquidity absorption operations, an important element of the money market rate steering system is reserve requirements. In 2015, the Bank of Russia plans to synchronise the schedule of required reserve averaging periods with the schedule of main auction operations. Moreover, the Bank of Russia will continue to gradually increase the required reserve averaging ratio. This will enable banks to more effectively adapt to fluctuations in liquidity levels, including by redistributing funds in the interbank market, and will contribute to reducing the volatility of money market rates. At the same time as developing the monetary policy instruments, the Bank of Russia will continue to implement measures in related spheres to improve the operational procedure. The Bank of Russia will continue its efforts to increase the level of mutual coordination of monetary policy operational parameters, as well as payment system and financial markets functioning. In so doing, the Bank of Russia will focus on developing a set of measures to improve the payment infrastructure, including synchronising the work of the payment system and Bank of Russia operations. This will help expand the opportunities for credit institutions to manage intra-day flow imbalances, as well as reduce the impact of large-value payments on the banking sector liquidity. To smooth out the impact of seasonal trends on banking sector liquidity, largely caused by uneven spending of budgetary funds, the Bank of Russia will continue to collaborate with the Federal Treasury on the management of budget account balances with the Bank of Russia. Auctions held by the Federal Treasury to deposit funds with credit institutions will assist 31

34 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 in increasing the effectiveness of monetary and fiscal policy. Such practices have proved themselves extremely effective in recent years. Alongside the employment of monetary policy instruments which influence the economy on an aggregate level, the Bank of Russia will continue to employ special refinancing programmes to stimulate individual segments of the credit market whose development has been hampered by structural factors. The Bank of Russia will monitor the results of these programmes and adjust their parameters, where necessary, on an on-going basis. The Bank of Russia will also introduce a new liquidity supply mechanism ( liquidity lines ) for banks, for which it will set liquidity coverage ratios in line with the requirements of Basel III. The Bank of Russia will emphasise the importance of explaining to credit institutions and other financial market participants the existing operational procedure and the specifics of monetary policy instruments. Accordingly, getting feedback from market participants and the opportunity to discuss decisions implemented by the Bank of Russia will play an important role. Increasing understanding and trust in the policies implemented will foster stable expectations with regard to interbank interest rates and reduce their volatility. In addition, this will enhance the pass-through of changes in the Bank of Russia rates onto other interest rates in the economy, which is a major component of the monetary policy transmission mechanism. Foreign exchange operations The Bank of Russia will complete its transition to a floating exchange rate by the end of The Bank of Russia will subsequently stop using the range of permitted values of the ruble-denominated dual currency basket (the operational band), but will be ready to conduct interventions in the domestic FX market should any threat to financial stability occur, including those related to significant growth in the volatility of the ruble. These operations will be occasional, being considered by the Bank of Russia as an extraordinary measure. Under these circumstances, exchange rate dynamics will be influenced by market factors, which will help improve the adaptation of economic agents both in the real and financial sectors of the Russian economy to changes in the external economic environment. Hence, strengthening of the national currency amid positive external forces (for instance, growth in export prices) reduces the risk of overheating the economy, while ruble depreciation, in turn, in case of a negative shock supports domestic producers, thereby mitigating the adjustment of aggregate goods and services output by increasing export volumes and substituting imported products by those produced in Russia. Thus, the floating exchange rate acts as a builtin stabiliser of the economy. By defining the monetary policy stance, the Bank of Russia will take into account the implications of exchange rate dynamics for inflation and business activity, and will also consider in its forecasts the potential effect of interest rates in the economy on the preferences of Russian and foreign investors, as reflected in the ruble exchange rate. Since the exchange rate policy mechanism has only implied smoothing out excessive exchange rate fluctuations in recent years, without influencing the trend, the Bank of Russia does not expect any significant increase in exchange rate pass-through effect. Increasing the flexibility of the exchange rate mechanism is an important prerequisite of an effective inflation targeting regime, and also makes it possible to improve the effectiveness of the Bank of Russia s interest rate policy. Taking into account the high level of flexibility in the exchange rate mechanism achieved in preceding years, the Bank of Russia also does not expect any significant increase in the volatility of the ruble exchange rate. Moreover, due to the increased consistency 32

35 Monetary policy instruments in and transparency of monetary policy under the inflation targeting regime, we can expect a fall in volatility in the financial markets, including in the foreign exchange market, as confirmed by international experience. Meanwhile, the significant role of cross-border capital flows in exchange rate dynamics, characterised by sharp and unpredictable fluctuations following a change in the sentiments of financial market participants, means that further development of the derivative financial instruments market is needed to manage exchange rate risk. The Bank of Russia will retain the possibility of conducting interventions in the domestic FX market in relation to the replenishment or spending of sovereign funds by the Russian Ministry of Finance and Federal Treasury. These operations of the Bank of Russia will make it possible to transmit foreign currency demand or supply from these agencies onto the domestic FX market. An even distribution of funds will limit the impact of these operations on ruble exchange rate dynamics. 33

36 Glossary Autonomous factors of banking sector liquidity Changes in the central bank balance sheet affecting banking sector liquidity, but which are not the result of central bank operations to manage liquidity. These autonomous factors include changes in cash in circulation, changes in general government account balances with the Bank of Russia, Bank of Russia operations in the domestic foreign exchange market (excluding operations regulating banking sector liquidity), as well as changes in required reserves deposited by credit institutions in required reserve accounts with the Bank of Russia. Average rate on interbank loans An average rate on Russian banks operations to provide loans to other banks. Rates are calculated on all interbank loans (MIACR), loans extended to Russian banks with investment grade ratings (MIACR-IG), and loans extended to Russian banks with speculative grade ratings (MIACR-B). The spread between MIACR-B and MIACR-IG is one of the indicators of credit risk assessment by the interbank lending market participants. Averaging of required reserves The right of a credit institution to meet required reserve ratios set by the Bank of Russia by maintaining a share of required reserves equal to the averaging ratio on a correspondent account with the Bank of Russia during a specified period. Banking sector liquidity Credit institutions funds held in correspondent accounts with the Bank of Russia to carry out payment transactions and to comply with the Bank of Russia s reserve requirements. Bank lending conditions index A generalised indicator of changes to bank lending conditions, as calculated by the Bank of Russia based on the results of a quarterly survey among leading Russian banks operating in the lending market as follows: (share of banks reporting a significant tightening of lending conditions, as a percentage) x (share of banks reporting a moderate tightening of lending conditions, as a percentage) 0.5 x (share of banks reporting a moderate easing of lending conditions, as a percentage) (share of banks reporting a significant easing of lending conditions, as a percentage). Measured in percentage points (pp). Bank of Russia interest rate corridor (interest rate corridor) The basis of Bank of Russia interest rate system. The centre of the corridor is set by the Bank of Russia key rate; the upper and lower bounds are rates of overnight standing facilities (deposit facilities and refinancing facilities) symmetric to the key rate. Bank of Russia key rate Interest rate on main operations of the Bank of Russia to manage banking sector liquidity. A key monetary policy indicator. Broad money (monetary aggregate M2X) Includes all the components of monetary aggregate M2 and foreign currency deposits of the Russian Federation residents (organisations and households) placed in the banking system of the Russian Federation. 34

37 Glossary Consumer price index (CPI) The CPI measures changes over time in the overall price level of goods and services purchased by households for private consumption. This index is calculated by the Federal State Statistics Service being the ratio of the value of a fixed set of goods and services in current prices to the value of the same set of goods and services in prices of a previous (reference) period. The CPI is calculated on the basis of data on the actual structure of consumer spending being therefore one of the key indicators of household living costs. Contractual committed liquidity facility of a central bank Contractual committed liquidity facility of a central bank is a refinancing instrument which allows (according to the Basel III methodology) to expand the volume of high-quality liquid assets in jurisdictions that do not have sufficient liquid assets. This instrument does not comprise regular credit facilities. Contractual credit facility is an explicit agreement meeting the following requirements: the term of the committed liquidity facility should exceed 30 days; the contract must be irrevocable; a fee for the facility must be charged regardless of the amount drawn down. Core inflation Inflation being measured as a core consumer price index (CCPI). The difference between the CCPI and the consumer price index (CPI) lies in the CCPI calculation method, which excludes a change in prices for individual goods and services subject to the influence of administrative and seasonal factors (fruit and vegetables, fuel, passenger transportation services, telecommunication services, and the majority of housing and public utility services). Dollarisation of deposits A share of deposits denominated in foreign currency in total deposits in the banking sector. Dual currency basket Operational indicator of the exchange rate policy of the Bank of Russia expressed in the national currency (in rubles) and made up of US dollars and euros (effective since February 2005). The ruble value of the dual currency basket is calculated as the sum of 0.55 US dollars and 0.45 euros in rubles (effective since 8 February 2007). Floating exchange rate regime Under this regime the exchange rate of the domestic currency is determined predominantly under the influence of market factors, and its path is unpredictable. The central bank does not set targets for the level of, or changes to, the exchange rate. In this case, the central bank conducts foreign exchange interventions to smooth out any excessive exchange rate fluctuations not associated with fundamental factors. Floating interest rate on Bank of Russia operations An interest rate tied to the Bank of Russia key rate. If the Bank of Russia Board of Directors decides to change the key rate for loans previously provided at a floating interest rate the interest rate applied will be adjusted to the change of the key rate with effect from the corresponding date. Foreign exchange swap operation A transaction which consists of two legs: one party to the deal initially exchanges a certain amount in domestic or foreign currency for an equivalent amount in another currency provided by the second party to the contract. Then, once the deal term has expired, the parties reverse-convert the currency (in the corresponding volumes) at a predetermined rate. Foreign exchange swaps are used by the Bank of Russia to provide credit institutions with refinancing in rubles. 35

38 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 Funds on general government s accounts Funds on accounts with the Bank of Russia representing funds of the federal budget, the budgets of constituent territories of the Russian Federation, local budgets, government extra-budgetary funds and extra-budgetary funds of constituent territories of the Russian Federation and local authorities. Gross credit of the Bank of Russia Includes loans extended by the Bank of Russia to credit institutions (including banks with revoked licences), overdue loans and overdue interest on loans, funds provided by the Bank of Russia to credit institutions through repos and currency swaps. Inflation targeting regime A monetary policy framework which considers maintaining price stability as the final target of the central bank. Under this regime a quantitative inflation target is set and announced. The central bank is responsible for achieving this target. Typically, under an inflation targeting regime, the monetary policy affects the economy through interest rates. Decisions are made primarily on the basis of economic forecasts and inflation dynamics. An important feature of this regime is regular explanations to the public of decisions adopted by the central bank, which guarantees its accountability and transparency. Interest rate corridor See Bank of Russia interest rate corridor. Monetary policy stance The characteristics of a monetary policy s impact on the economy. Tight stance suggests the restraining effect of the monetary policy on economic activity in order to reduce inflationary pressures, whereas a loose monetary policy stance implies economic stimulation with possible upward pressure on inflation. Monetary policy transmission mechanism The process of transferring the impulse of monetary policy decisions (i.e. decisions made by a central bank in relation to changes to interest rates on its operations) to the economy as a whole and to price dynamics, in particular. The most important channel of monetary policy transmission is the interest rate channel. The impact of the latter is based on the influence of a central bank policy on changes to the interest rates at which economic agents may deposit and raise funds, and as a result on decisions regarding consumption, saving and investment and, thereby, on the aggregate demand, economic activity and inflation. Money supply (monetary aggregate M2) Total amount of cash in circulation and cashless funds of the Russian Federation residents (nonfinancial and financial (excluding credit) organisations and households) in deposit and ondemand accounts opened in the banking system in the currency of the Russian Federation. Net credit of the Bank of Russia to credit institutions Gross credit of the Bank of Russia to credit institutions net of correspondent account balances in the currency of the Russian Federation (including the averaged amount of required reserves) and deposit account balances of credit institutions with the Bank of Russia, and investments by credit institutions in Bank of Russia bonds (at prices fixed as of the start of the current year). 36

39 Glossary Net private capital inflow/outflow The total balance of private sector operations involving foreign assets and liabilities recorded on the financial account of the balance of payments. Nominal effective ruble exchange rate index The nominal effective ruble exchange rate index reflects changes in the exchange rate of the ruble against the currencies of Russia s main trading partners. Being calculated as the weighted average change in the nominal exchange rates of the ruble to the currencies of Russia s main trading partners. The weights are determined according to the foreign trade turnover share of Russia with each of these countries in the total foreign trade turnover of Russia with its main trading partners. Non-marketable assets eligible as collateral for Bank of Russia loans Promissory notes and credit claims eligible as collateral for Bank of Russia loans in accordance with Bank of Russia Regulation No. 312-P, dated 12 November 2007, On the Procedure for Extending Bank of Russia Loans Secured with Assets or Guarantees to Credit Institutions. Non-price bank lending conditions Bank lending conditions aside from the cost of a loan to the borrower, such as maximum loan amount and lending term, collateral requirements and the financial standing of the borrower. Open market operations Operations carried out on the initiative of a central bank. This type of operations includes auctionbased refinancing and liquidity-absorbing operations (repo auctions, deposit auctions, etc.), as well as purchases and sales of financial assets (government securities, currency, gold). Output gap Deviation of GDP from potential output, expressed as a percentage. Characterises the balance between demand and supply and may be regarded as an aggregate indicator of the effect which the demand factors have on inflation. If the actual output is larger than the potential output (positive output gap), all else equal, inflation is expected to accelerate. A negative output gap is an indicator of an expected slowdown in price growth. Output fluctuations around the potential level are called cyclical fluctuations. Outstanding amount on Bank of Russia refinancing operations Includes loans extended by the Bank of Russia against the collateral of securities, non-marketable assets, guarantees, and gold, as well as repo auctions and FX swaps. Potential output The aggregate level of output in the economy achieved under normal utilisation of production factors with existing resource and institutional constraints. Reflects the volume of products that may be produced and sold without creating prerequisites to a change in price growth rates. The level of potential output is not linked to a certain level of inflation; it merely indicates the presence or absence of conditions for the inflation acceleration or deceleration. Real effective ruble exchange rate index Calculated as the weighted average change in real exchange rates of the ruble to the currencies of Russia s main trading partners. The real exchange rate of the ruble to a foreign currency is calculated using the nominal exchange rate of the ruble to the same currency and the ratio of 37

40 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 price levels in Russia to those in the corresponding country. When calculating the real effective exchange rate, weights are determined according to the foreign trade turnover share of Russia with each of these countries in the total foreign trade turnover of Russia with its main trading partners. The real effective ruble exchange rate index reflects changes in the competitiveness of Russian goods in comparison to those of Russia s main trading partners. Repo operation A deal which consists of two legs: one party to the deal initially sells securities to the other party in return for cash, and then, once the deal term has expired, buys them back at a predetermined price. Repos are used by the Bank of Russia to provide credit institutions with ruble liquidity in exchange for collateral in the form of securities. Standing facilities Operations carried out by the Bank of Russia to provide and absorb liquidity at fixed interest rates. Structural liquidity deficit The state of the banking sector characterised by a stable demand by credit institutions for liquidity through operations with the Bank of Russia. The reverse situation, characterised by a stable demand by credit institutions to deposit funds with the Bank of Russia is a structural liquidity surplus. A calculated level of structural liquidity deficit/surplus is a difference between amounts outstanding on Bank of Russia refinancing and liquidity-absorbing operations. 38

41 Appendix Statistical tables Table 1 Consumer prices by group of goods and services (annual percentage changes) Inflation Core inflation Food price growth Food price growth 1 Vegetable and fruit price growth Non-food price growth Growth in non-food prices, excluding petrol prices 2012 January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July August Excluding vegetables and fruit. Sources: Rosstat, Bank of Russia. Service price growth 39

42 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 Table 2 Consumer prices by group of goods and services (month-on-month percentage changes) Inflation Core inflation Food price growth Food price growth 1 Vegetable and fruit price growth Non-food price growth Growth in non-food prices, excluding petrol prices Service price growth 2012 January February March April May June July August September October November December Full year (December on December) January February March April May June July August September October November December Full year (December on December) January February March April May June July August Excluding vegetables and fruit. Sources: Rosstat, Bank of Russia. 40

43 Appendix Key macroeconomic indicators Table 1 Macroeconomic indicators (annual percentage changes, unless otherwise indicated) GDP 1 IKI 2 Industrial production Agriculture Construction Transport freight turnover Retail trade turnover Wholesale trade turnover Fixed capital Household real investment disposable money income Real wages Unemployment rate (as a percentage of economically active population) 2012 January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July August Quarterly data. 2 Output index of goods and services by key industries. Source: Rosstat. 41

44 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 Macroeconomic development scenarios Table 1 Bank of Russia key projections (annual percentage changes, unless otherwise indicated) 2013 (actual) 2014 (estimate) Variant I Variant II Variant III Variant I Variant II Variant III Variant I Variant II Variant III Price of Urals crude, US$/barrel Gross domestic product Inflation, as of year-end Money supply in the national definition Monetary base (narrow definition) Loans to non-financial organisations and households in rubles and foreign currency Sources: Rosstat, Bank of Russia. Table 2 GDP and expenditure components (in constant prices, annual percentage changes) 2013 (actual) 2014 (estimate) Variant I Variant II Variant III Variant I Variant II Variant III Variant I Variant II Variant III GDP Final consumption expenditures households Gross capital formation gross fixed capital formation Net exports exports imports Sources: Rosstat, Bank of Russia. 42

45 Appendix Table 3 Russian balance of payments forecast for (billions of US dollars) 2013 (actual) 2014 (estimate) Variant I Variant II Variant III Variant I Variant II Variant III Variant I Variant II Variant III Current account Balance of trade Exports Imports Balance of services Exports Imports Balance of primary and secondary income Capital account Balance from current and capital accounts Financial account (excluding reserve assets) General government and the central bank Private sector (including net errors and omissions) Change in reserve assets («+» decrease, «-» increase) Variant I and variant II scenarios do not envisage changes in in reserve assets due to Bank of Russia operations to buy and sell foreign currency in the domestic market within the framework of the exchange rate policy (taking into account the transition to the floating exchange rate regime from 2015) and by using (replenishing) the Reserve Fund and the National Wealth Fund, and due to the operations with precious metals and income from reserve asset management. The alternative scenario (variant III) stipulates a reduction in reserve assets due to the use of the Reserve Fund under applicable fiscal rules, including to cover budget deficit considering the deсrease in oil-and-gas revenues. Source: Bank of Russia. 43

46 Guidelines for the Single State Monetary Policy in 2015 and for 2016 and 2017 Table 4 Monetary programme projections for (trillions of rubles) (actual) (estimate) Variant I Variant II Variant III Variant I Variant II Variant III Variant I Variant II Variant III Monetary base (narrow definition) cash in circulation (outside the Bank of Russia) required reserves Net international reserves in billions of US dollars Net domestic assets Net credit to general government net credit to federal government of which funds of the Reserve Fund and National Wealth Fund in ruble terms account balances of consolidated budgets of the Russian Federation constituent territories and government extrabudgetary funds with the Bank of Russia Net credit to banks gross credit to banks of which claims on refinancing opertaions correspondent and deposit accounts of credit institutions with the Bank of Russia (free reserves) Other non-classified assets, net Programme indicators, calculated at a fixed exchange rate, are based on the official exchange rate of the ruble as of the beginning of Variant I and variant II scenarios do not envisage changes in in reserve assets due to Bank of Russia operations to buy and sell foreign currency in the domestic market within the framework of the exchange rate policy (taking into account the transition to the floating exchange rate regime from 2015) and by using (replenishing) the Reserve Fund and the National Wealth Fund, and due to the operations with precious metals and income from reserve asset management. The alternative scenario (variant III) stipulates a reduction in reserve assets due to the use of the Reserve Fund under applicable fiscal rules with a simultaneous increase in net credit to general government by a corresponding amount in ruble terms. 3 Include claims on secured loans, repos, and FX swaps. Source: Bank of Russia. 44