By Andrey Ostroukh

MOSCOW (Reuters) – Russia will need to raise interest rates further to combat stubbornly high inflation that overshot forecasts and shows little signs of slowing, a Reuters poll showed on Thursday.

Russia’s export-oriented economy is already at pre-pandemic levels, and it looks set to continue growing. However, the combination of global inflation and a weak ruble is driving consumer prices up, which in turn affects living standards.

According to 22 survey respondents, the consensus prediction for October was that the central banks would increase its key rate by 7% at their Oct. 22 meeting.

Analysts believe the central bank might raise its key rate to 7.25% to address inflation, which has accelerated to 7.3% since September. This is an increase that was not possible five years ago or above the target of 4%.

“It seems, that Russia now has to deal with the effects of additional social payments which the government made ahead of the Parliamentary Elections held 17-19 September,” ING stated.

The President Vladimir Putin made a special payment to the military and pensioners in advance of the election. This increased inflationary expectations.

Inflation at the end of 2021 was expected to rise to 6.5%, compared with 6.0% as reported in late August.

The higher interest rates will help to manage inflation in Russia which has been a sensitive topic. They should also make investments in high yielding rouble assets attractive, helping the rouble.

The rouble will trade at 72.70 against the dollar and 86.00 against the euro in 12 months, according to analysts. This is compared to forecasts of 75.00 and 89.00 for the last poll.

Oxford Economics Research firm stated that they remain positive on the rouble owing to better fundamentals.

We believe that despite the fact that net capital outflows are increasing, rouble, currently sitting at 73, will gain only 3% against the USD over the remaining 2021.

The poll showed that despite higher interest rates, the economy is still expected to grow by 4.3% in 2019, its fastest growth rate since a decade. This confirms the prediction from one month ago.

The Reuters poll used at least 10 projections to forecast the future.