(Updates with additional details, background)
By Sujata Rao and Sebastian Tong
LONDON, Nov 30 (Reuters) - Russia's economic recovery remains fragile and it is too early for the central bank to start raising interest rates, Deputy Economy Minister Andrey Klepach said on Tuesday.
Russia's interest rates remain at a record low of 7.75 percent but central bank officials have hinted that chances of a rate increase are growing thanks to an improvement in the growth outlook and higher inflation. [ID:nLDE6AS0DX]
The bank left rates on hold this month but in its post-meeting statement, it removed a phrase about policy likely remaining unchanged in coming months.
Klepach agreed with the central bank's view of an improving economy but said it was too early for policy tightening.
"We don't think there is any need to raise rates just yet. When inflation picks up more, there will be a case but right now economic growth is still very fragile," he told reporters on the sidelines of an Adam Smith banking forum in London.
Speaking in Russian, he said the economy's continued recovery from its worst recession in 15 years will result in industrial production growth this year of 8 percent instead of the previous estimate of 7.6 percent.
Economic growth in Russia lags other big emerging markets and the pace slowed further in the third quarter to just 2.7 percent. Klepach said Russia is likely to end 2010 with growth of around 3.8 percent.
One reason for the weakness was the disastrous drought that hit Russia earlier this year and devastated the harvest in one of the world's biggest grain producers.
Klepach said the government forecasts a strong rebound in the agricultural sector next year, with the harvest seen at 85 million tonnes versus this year's 60.5 million.
"It's tough to make concrete forecasts at this stage... we have to see how the winter goes. But our expectation is of a significant rise in agricultural output," he added.
Klepach reiterated forecasts for 6.5-7.0 percent inflation in 2011 down from 8.3-8.5 percent this year.
Since the start of 2010, prices have risen 7.4 percent but inflation tends to spike towards year-end as the government ramps up spending.
"The base case is inflation won't exceed 0.8 percent in November and the same in December, those are our preliminary estimates," Klepach said.
He added that the rouble
BUDGET DEFICIT
Russia has benefited this year from oil prices of over $80 per barrel but is nevertheless expected to post a budget deficit of between 4.4-5.0 percent of gross domestic product.
However, Klepach told the conference the gap could be less than 4 percent.
"The key difference (in deficit) was not oil revenues. The main factor for the (smaller) deficit is 400-500 billion (roubles) less expenditure," he said.
His estimate is more optimistic than that of Finance Minister Kudrin who was quoted by Interfax news agency as saying the budget deficit would be 4.3 percent of GDP this year.
In his state of the nation address on Tuesday, President Dmitry Medvedev pledged to work on reducing the budget deficit in coming years. [ID:nLDE6AT13N]
But Klepach said the need for higher spending on healthcare, education, science and defence would likely prevent Russia from achieving its goal of a zero budget deficit by 2015.
"By 2015 our objective is to achieve a zero deficit in the budget. If we want to implement healthcare, defence, education ...we are not able to achieve zero...you make your own calculations. that's why we are still looking for solutions," he said.
A stable economic system and steady growth rates of 4-5 percent is ideal, he noted, warning that otherwise the economy would remain vulnerable to outside shocks.
The country will continue to suffer capital outflows this year, Klepach noted, predicting a hefty $22-$25 billion.
(Reporting by Sujata Rao and Sebastian Tong; Editing by John Stonestreet)