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UPDATE 3-Russia ups key rate sharply to 7.5%, signals further hikes

* Russia hikes key rate by 75 bps, more than expected

* Inflation is at 7.8% as of Oct. 18, above key rate of 7.5%

* Cenbank says more hikes possible as inflation stays high

* Cenbank raises 2022 average rate forecast

* Decision sparks rally in rouble (Updates with cenbank governor, analysts comments)

MOSCOW, Oct 22 (Reuters) - Russia’s central bank raised its key interest rate by more than expected to 7.5% on Friday, sparking a rally in the rouble, and signalled further increases as inflation showed little sign of slowing.

The central bank, which targets inflation at 4%, raised rates for the sixth time this year to tame the highest inflation since early 2016, brushing off concerns that higher rates could harm businesses with more expensive borrowing.

The decision to raise the rate by 75 basis points sent the rouble beyond 70 versus the dollar to levels last seen in June 2020. It also surprised the market which had on average expected the bank would opt for 50 bps after raising rates by 25 bps in September.

“This is a significant increase and, obviously, this is not a fine-tuning exercise,” Governor Elvira Nabiullina said, presenting the rate move.

Confirming the bank’s readiness to fight inflation further, Nabiullina said the board also considered a 100 bps hike on Friday and such a step could not be ruled out in the future.

High inflation dents living standards and has been one of the key concerns among households, prompting authorities to offer social support payments that can in turn spur inflation further.

Higher rates help tame consumer inflation by pushing up lending costs and increasing the appeal of bank deposits.

The central bank revised its year-end inflation forecast to 7.4-7.9% from 5.7-6.2% but said it was on track to return to 4.0-4.5% in 2022.

It was too early to speak of the end to monetary tightening as the key rate may stay at a “elevated level” longer than previously expected, Nabiullina said of the bank’s revision of 2022 average rate forecast to 7.3-8.3% from 6.0-7.0%.

Higher rates are also supportive of the rouble, while expectations that the rate-hiking cycle is close to its peak and will reverse at some point could spur inflows of foreign funds into Russian treasury bonds.

Citi, ING and Renaissance Capital said they expected the central bank to raise the key rate by 25 basis points to 7.75% as its next Dec. 17 board meeting.

“We think the policy rate will be hiked to 8.25% by year-end and remain higher than most expect throughout 2022,” Capital Economics said.

Writing by Andrey Ostroukh; Additional reporting by Gabrielle Tétrault-Farber, Alexander Marrow, Elena Fabrichnaya, Polina Devitt, Maria Kiselyova; Editing by Mark Trevelyan and Philippa Fletcher

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