By Andrey Ostroukh

MOSCOW (Reuters). Russia must raise interest rates this year to the highest level since 2017, and maintain them there for several months, as rising inflation is a sign of strong economic recovery. A Reuters poll on Friday showed that Russia needs to do so.

Russia’s rising inflation stems from higher global prices and weaker roubles at home. This affects living standards, and the central bank raises lending costs.

An average of 19 experts polled late October indicated that central banks will increase their key rate to 8% at its Dec. 17 board meeting.

Year-end projections for the year ranged from 7.5% to 8.5%, and they were higher than 6.5% predicted by the same poll in September. This was before central banks raised the key rate last week to 7.5%. However, it did not exclude further increases.

Sovcombank analysts stated that Russia would raise its interest rate to 8.5% December, as the inflation is expected to remain at 8% next month. This “will require a determined action.”

According to the average forecasts, annual inflation is projected to be 7.8% in 2018, up from 6.5% according to the previous poll.

While higher interest rates may be designed to reduce inflation (a sensitive topic in Russia), they could hinder economic recovery.

Russia’s economy should grow by 4.4% in 2019, after experiencing the sharpest contraction of 11 years, which occurred in 2020, when it contracted 3%.

Higher rates could also be a support for the rouble and make it attractive to invest into high-yielding, rouble assets.

Anton Tabakh (chief economist, Expert RA rating agency) stated that “the central banks’ efforts as well as the strengthening of the rouble due to the prices for non-oil imports could cause a sharp slowdown inflation in the first half 2022,” when high rates may start suppressing economic growth.

Longer term, average poll forecasts suggest that the rouble could trade at 72.75 dollars and 83.50 euros 12 months after now. This compares with previous poll forecasts which were 72.70 and 89.00 respectively.

Official exchange rates for Russia on Friday were 70.52 US Dollar and 81.84 Euro.

The majority of the forecasts used in the Reuters poll were based upon at least 10 separate projections.