Elvira Nabiullina compared an overheated economy to an overclocked car

“We will drive quickly, but not for long”

It is impossible to refuse to raise the key rate, otherwise the economy will suffer. With this statement, Elvira Nabiullina responded, in essence, to those critics of the Central Bank who tirelessly accuse the regulator’s leadership of actually strangling the Russian economic economy and business due to rising loan prices. Thus, the speech at the Friday press conference of the head of the Central Bank was about things that were as conceptual as possible. The core topic was, of course, inflation.

According to Nabiullina, high and persistent inflation indicates an overheating of the economy, a shortage of production and labor resources in the country, and that the economy has deviated from its potential and cannot keep up with growing demand. “And if we didn’t tighten monetary policy, it would only hurt it.” Earlier in its press release, the Central Bank reported that on average for October-November, seasonally adjusted price growth was 10% annualized (compared to 12.2% in the third quarter).

“Imagine that the economy is a car,” the head of the Central Bank figuratively remarked. – If we try to drive faster than the car’s design, and press on the gas with all our might, the engine will sooner or later overheat, and we won’t get far. We may be driving quickly, but not for long.” That is, an attempt to grow faster than potential through soft monetary policy will result in rising prices, which will “eat up savings and wage growth.”

“As a result, we will not get a real increase in the well-being of society. This is exactly what we want to avoid, ensuring that inflation returns to the target and the economy returns to the trajectory of balanced, sustainable growth,” Nabiullina explained. According to her, the key rate of the Central Bank will remain high as long as the economic situation in the country requires it.

Once again, as at previous briefings, the idea was voiced: preferential mortgages (in November they accounted for 80% of the volume of all issued housing loans) are generally evil, since they create risks of overheating in the housing lending market. According to Nabiullina, the non-addressed preferential mortgage, which was launched as an anti-crisis measure in the spring of Covid 2020, needs to be completed in July 2024, and the parameters of the family mortgage require discussion at the government level. The main problem is that cheap loans are given to selected categories of Russians, and everyone else has to pay for it. A vicious circle arises “when there is a temptation to respond to a high key rate by expanding such programs.”

Elvira Nabiullina listed the main risks for the Russian economy in the next year or year and a half. From the external side, these are, first of all, sanctions, a slowdown in the global economy, increased volatility in global commodity and financial markets, and from the internal side, a decrease in consumer prices at a rate lower than the expectations of the Central Bank and an increase in labor shortage.

Among the questions that Nabiullina was asked by federal and regional media, there was a question from an MK correspondent: “You said that by the end of next year you expect inflation to be slightly above 4%. What prerequisites does the regulator see for reducing the indicator from the current 7.5% to 4%: there will be a large harvest, a barrel of oil will reach $100 dollars, the production of chicken and eggs will be launched in large quantities, import substitution will work at full capacity?”

“Inflation at 4% means that prices will not rise as quickly as this year. On average, 4-4.5%,” Nabiullina answered. – Of course, there may be one-time factors that you are talking about, but we believe that stable inflation will not depend on them. This will happen precisely because demand will match supply capabilities. Our monetary policy is aimed at this. When we increase our rate, this is translated into lending and deposit rates with a certain lag, which affects demand and, ultimately, prices. We have used this mechanism more than once, in particular, when we reduced inflation from 2015 to 2018 to 4%.”

Let us remind you that the next meeting of the Board of Directors of the Bank of Russia, at which the issue of the level of the key rate will be considered, is scheduled for February 16, 2024.