RUSSIAN ECONOMIC OUTLOOK AND MONETARY POLICY. RUSSIA S ECONOMIC OUTLOOK AND MONETARY POLICY February 2019

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1 % RUSSIA S ECONOMIC OUTLOOK AND February 19

2 Consumer prices In January 19, annual inflation held at the lower bound of the Bank of Russia expectations (.% YoY). Faster growth of food prices to.% (vs.7% in December 1) played a significant role in the inflation rise. The contribution of the VAT increase to annual consumer price growth in January was moderate. Prices are completing their adjustment to the ruble s weakening of the second half of 1 Contribution of components to the change in annual inflation in January 1, ppts 1 CPI components, % YoY December 1 Regulated tariffs and petrol Food goods (excluding vegetables, potatoes and fruits).3 1 Non-food goods (excluding petrol) Fruits and vegetables (including potatoes) Services (excluding regulated tariffs) Discrepancy January 19.,..,.,.,,., Non-food goods Food goods Services CPI Sources: Rosstat, Bank of Russia

3 3 Inflation expectations summary Inflation expectations (absolute numbers), % Households Horizon I II III IV Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan FOM Next 1 months FOM (observed inflation) Prev. 1 months FOM (Bank of Russia calculations) Next 1 months Professional analysts Bloomberg Interfax Reuters Financial markets OFZ IN (option not subtracted) Next years OFZ IN (option not subtracted) Next years Inflation expectations (balanced index*) Households FOM Next 1 months FOM Next month Businesses Bank of Russia monitoring Next 3 months PMI input prices Next month PMI output prices Next month Retail prices (Rosstat) Next quarter Tariffs (Rosstat) Next quarter Change: - Inflation expectations become better (more than 1 standard deviation) - Inflation expectations become better (less than 1 standard deviation) - Inflation expectations unchanged (±, standard deviations) - Inflation expectations become worse (less than 1 standard deviation) - Inflation expectations become worse (more than 1 standard deviation) *Balanced index is the difference between the shares of those who expect prices to rise and to fall Sources: FOM, Rosstat, Bloomberg, Interfax, Thompson Reuters, Bank of Russia

4 Inflation expectations households In January, household inflation expectations rose only slightly (by only +. ppts compared to December) Observed inflation Expected inflation CPI Source: LLC infom

5 Balance of replies (SA), % Inflation expectations businesses In January, price expectations of businesses increased on the back of the earlier weakening of the ruble and the VAT increase Replies of firms to the question: How will the prices of final goods change in the upcoming 3 months (increase/decrease)? Businesses - total Mining and quarrying Manufacturing Agriculture Construction Wholesale and retail trade Transportation and storage Services Sources: Bank of Russia s monitoring of businesses survey

6 Economic activity GDP growth and industrial production Rosstat s flash estimate shows that 1 GDP growth totalled.3%, which exceeds the Bank of Russia s forecast of 1.-%. However, recent months have seen slower growth in economic activity Industrial production with contributions (adjusted for calendar factor), % YoY Calendar factor 17 1 Mining and quarrying Manufacturing Utilities (before 1) Utilities: electricity, gaz and steam (since 1) Utilities: water, pollution control activities (since 1) Omissions Industrial output (right axis), % Sources: Rosstat, Bank of Russia PMI indicators PMI in manufacturing PMI in manufacturing (new orders) PMI in manufacturing (new export orders)

7 7 Retail sales and savings rate Consumer demand growth is moderating with retail sales at +.3% YoY in December, still mostly driven by non-food sales. Savings rate grew to 3% in December, which is still well below 1-17 averages Retail trade turnover and real wages dynamics Contributions to the savings rate (seasonally adjusted), ppts %.7% 1.%.3% 9.% 3.% % % % 1% 1% % % % -% % % % -% - -% -% % -1% Non-food goods, pps Food goods, pps Retail trade turnover, % YoY Real wages (left axis), % YoY -% Equity Currency assets (currency, currency deposits) Ruble financial assets (deposits, stock and cash) Borrowing Savings rate -% Sources: Rosstat, Bank of Russia etc.

8 Deposit and credit market lending Lending growth is still ongoing, both for retail and corporate lending. Though the growth rate has somewhat slowed down amid rising interest rates Contribution of different components to bank lending growth, ppts Loans to large enterprises Loans to small and medium companies Mortgage loans Consumer loans Revaluation of foreign currency loans Total loan portfolio, % Total loan portfolio*, % * Excluding foreign currency revaluation -1 Source: Bank of Russia

9 9 Deposit and credit market interest rates Interest rates in the deposit and credit market have risen slightly. Sustained positive real interest rates are set to support the attractiveness of bank deposits and bonds and balanced growth in consumption 1 The dynamics of interest rates on household ruble deposits, % per annum The dynamics of interest rates on corporate loans in rubles, % per annum Source: Bank of Russia Interest rate on short-term household deposits Interest rate on long-term household deposits Maximum interest rate on household deposits* Key rate CPI, % YoY * Monetary policy department calculations Interest rate on long-term loans Interest rate on long-term loans for small and medium businesses Corporate bond yield (IFX-Cbonds) Key rate CPI, % YoY

10 Money market conditions In the light of the persistent structural surplus MIACR remains moderately below the key rate. In Q 1 the spread averaged at - bps. In Q1 19 the average spread so far is -9 bps, which is the least deviation from the key rate since Q 17 11,,, 9, 9,,, 7, 7,,,,,, The dynamics of the key rate and MIACR, % p.a , Source: Bank of Russia Interest rate corridor bounds MIACR BoR key rate -9,,, 3, 3,,, 1, 1,,, -, -1, The structure of Bank of Russia s liquidity management operations, bln rubles Structural surplus of, trln rub. as of Amount outstanding on other refinancing operations Standing REPO facilities REPO auctions Bank of Russia bonds Standing deposit facilities Deposit auctions

11 11 Monetary policy and inflation around the globe (1) Analysts are expecting policy rate cuts in particular EM (Mexico, Turkey). Inflationary pressure in DM has fallen due to lower oil prices Inflation data for South Africa, Chile, South Korea, China, Brazil and Poland is as of November 1. For Australia as of Q3 1. Source: Bloomberg Current situation M (bps) Dec.1 M (ppts) Q1 to the current rate (bps) Analysts expectations Q1 Interest rate Inflation (YoY) Interest rate Inflation (YoY) to current inflation (ppts) Rise is expected ( ) / Reduction is expected ( ) Developed economies USA (upper bound).% (+) 1.9% (-).9% (+).3% (+) Canada 1.7% (+).% (-).% (+).% (-) United Kingdom.7% (+).1% (-3) 1.% (+).% (-) Norway (Deposit Rate).7% (+) 3.% (+9) 1.% (+).1% (-1) Eurozone (Main refinancing rate).% (-) 1.% (-).% (+) 1.% (-) Japan (Target rate) -.% (-).3% (-).% (+) 1.9% (+1) Australia 1.% (-) 1.9% (-) 1.% (+1).3% (+) Switzerland -.7% (-).7% (-) -.% (+3) 1.% (+3) Developing economies Аргентина (LELIQ 7-D Notes Rate) 7,% (+17) 7,% (+113) 31,3% (-9),9% (-7) Турция,% (+),3% (+91) 1,1% (-) 13,9% (-) Индонезия,% (+7) 3,1% (-),3% (+3) 3,9% (+) Мексика,% (+),% (+) 7,7% (-) 3,% (-) Индия (Repo Rate),% (+),% (-7),% (+),% (+) ЮАР,7% (+),% (+) 7,% (+3),% (+) Чили,7% (+),% (+) 3,% (+9),9% (+) Южная Корея 1,7% (+),% (+) 1,9% (+1) 1,% (-) Китай (Lending Rate),3% (-),% (+),3% (-),% (+) Бразилия,% (-),1% (+) 7,% (+),1% (-) Польша 1,% (-) 1,3% (-) 1,% (+1),% (+1) Тайвань 1,3% (-),3% (-1) 1,% (+) 1,% (+9)

12 1 Monetary policy and inflation around the globe () The revisions of the expected paths of monetary policy tightening by the US Federal Reserve and other central banks in developed markets reduce the risks of persistent capital outflows from emerging markets Longer Term Federal funds effective rate Dot Plot Dec 1 (--1) Dot Plot Sept 1 (-3-1) US Market Implied Policy Rate, Jan. (Bloomberg) Eurozone Market Implied Policy Rate, Jan (Bloomberg) Eonia

13 13 Financial markets global Equity market volatility has abated, which has restored the global demand for risk USD exchange rate , 1, ,1 1, 1, 1, DXY EURUSD (right axis, inv.) S&P S&P Source: Reuters US Treasuries 3, 3,3 3,1,9,7,,3,1 1,9 1,7 1, 1 19 Treasuries Y Treasuries Y Stoxx Stoxx Bank of Russia s Board meeting VIX VIX 13 1 MSCI EM MSCI EM

14 1 Financial markets selected EM countries China India Brazil, 1 3,, 1 1, 7 3 1, year government bond yield Policy rate USD exchange rate (right axis) 7, year government bond yield Policy rate USD exchange rate (right axis) year government bond yield Policy rate USD exchange rate (right axis) Mexico South Africa Turkey year government bond yield Policy rate USD exchange rate (right axis) year government bond yield Policy rate USD exchange rate (right axis) year government bond yield Policy rate USD exchange rate (right axis) Source: Bloomberg Bank of Russia s Board meeting

15 1 Oil and Russian financial markets Improved risk appetite and oil price growth have contributed to a decrease in CDS, ruble strengthening and stock market growth Exchange rate 7 1,3 7 1, 1, 1,1 1,1 1, USDRUB EURUSD (right axis) 3M ruble volatility USDRUB 3M VOL Sources: Reuters, Bloomberg, Bank of Russia calculations CDS CDS Russia CDS EM OFZ yields Y OFZ yield Y OFZ yield Key rate Bank of Russia s Board meeting Equity indexes MOEX RTS (right axis) Oil price Brent WTI

16 1 Oil price assumptions The baseline projection assumes faster convergence to the longer-term steadystate; now at $/bbl for Urals in 19 and onwards (October forecast: 3--) 1 Oil price path, USD per barrel Baseline (December) High oil prices (December) Fact Baseline (October) Unchanged oil prices (October) Source: Monetary policy report (December 1)

17 17 Bank of Russia s baseline scenario (December 1) Annual inflation will slow down to % in the first half of when the effects of the ruble s weakening and the VAT rise peter out Higher potential growth rates in -1 if the planned fiscal and structural measures are successfully implemented Source: Monetary policy report (December 1)

18 1 Bank of Russia s baseline scenario (December 1) details Increase compared to the previous period in % (unless noted otherwise) 17 (fact/ estimate) Baseline* Urals price (average for year), USD per barrel 3 7 Inflation in December compared to previous December, % Inflation (average for year) compared to the previous year, % GDP** Final consumption expenditures - of households Gross capital formation - gross fixed capital formation Exports Imports (-1.-.) Money supply (using the national definition) Lending to non-financial organisations and households, in roubles and foreign currencies*** Lending to non-financial and financial organisations, in rubles and foreign currencies - Lending to households, in rubles and foreign currencies * Published in Monetary policy report (December 1) ** 17 data Bank of Russia estimate with Rosstat-revised industrial production data factored in *** Banking sector s lending to the economy is defined as all the claims of the banking sector to financial and non-financial organisations as well as households in Russian or foreign currency and precious metals, including loans provided (with overdue debt counting as well), overdue interest on loans, credit institutions investment in equity and debt securities and promissory notes, any forms of participating in the equity of financial and non-financial organisations, and any other receivables for settlements with financial and non-financial organisations and households

19 19 Bank of Russia s baseline scenario (December 1) balance of payments USD billions 17 (estimate) Baseline* Current account Trade balance Export Import Balance of services Export 1 Import Balance of primary and secondary income Capital account Financial transactions account (reserve assets excluded) Public administration and central banks Private sector Net errors and omissions Change in FX reserves (+ is for decrease, - is for growth) * Using BPM methodology. Due to rounding total results may differ from the sum of respective values Published in Monetary policy report (December 1)

20 Monetary policy decision, February 19 Inflation and inflation expectations In January 19, annual inflation held at the lower bound of the Bank of Russia expectations The contribution of the VAT increase to annual consumer price growth in January was moderate. The effect of the VAT increase on inflation can be fully captured no sooner than this April Prices are completing their adjustment to the ruble s weakening of the second half of 1 In January, price expectations of businesses increased on the back of the earlier weakening of the ruble and the VAT increase. Household inflation expectations rose only slightly The Bank of Russia forecasts annual inflation to range between. and.% by the end of 19 and return to % in the first half of when the effects of the ruble s weakening and the VAT rise peter out Monetary conditions have seen no significant changes since the last Board meeting Economic activity Rosstat s flash estimate shows that 1 GDP growth totalled.3%, which exceeds the Bank of Russia s forecast of 1.-% However, recent months have seen slower growth in economic activity The Bank of Russia maintains its 19 GDP growth forecast in the range of %. The newly received budgetary funds will be used to raise government spending including investment as early as 19. Subsequent years might see higher economic growth rates as the planned structural measures are implemented. The balance of risks remains skewed towards pro-inflationary risks, especially over a short-term horizon The main risks: (1) the effects of the VAT increase, () price movement in individual food products, (3) сontinuing uncertainty over future external conditions and their impact on financial asset prices, () high risks of supply exceeding demand in the oil market in 19 Moderate risks estimates are mostly unchanged: () wage movements, () possible changes in consumer behavior, (7) budget expenditures Decision The Bank of Russia keeps the key rate at 7.7% p.a. Signal In its key rate decisionmaking, the Bank of Russia will determine if the increases of the key rate in September and December 1 were sufficient to bring annual inflation back to the target in, taking into account inflation and economic performance against the forecast, as well as the risks associated with external conditions and financial markets response to them

21 1 Bank of Russia s FX operations related to the fiscal rule On 1 December 1 the Bank of Russia decided to resume regular foreign currency purchases in the domestic market as part of fiscal rule implementation from 1 January 19. The decision was made given the stabilisation in the domestic financial market. On January 19 the Bank of Russia decided to commence from 1 February 19 the foreign currency purchases in the domestic market that were postponed in 1 as part of fiscal rule implementation. The postponed purchases will be carried out gradually in the 3 months since the launch of these operations. These operations will increase the daily amount of foreign currency purchases in the domestic market under the fiscal rule by. billion rubles. The Bank of Russia reserves the right to suspend foreign currency purchases in the domestic market under the fiscal rule in the event of financial stability threats. Source: Press release «On fiscal rule-based operations» as of and «On postponed foreign currency purchases under the fiscal rule» as of.1.19