Serbian Central Bank Board Raises Europe's Highest Benchmark Rate to 10.5%

Serbia’s central bank raised its benchmark interest rate to 10.5 percent, giving the Balkan nation the highest policy rate in Europe to fight accelerating inflation and pressures stemming from a weakening dinar.

The one percentage-point increase today by the Belgrade- based National Bank of Serbia was its fourth in four months. Twelve of 22 respondents in a Bloomberg survey forecast an increase of between a quarter-point and a full point. Ten saw the two-week repurchase rate unchanged.

The bank took “into account the need to halt an increase in inflationary pressures, fuelled by an increase in food prices, the impact of the dinar’s depreciation so far, as well as a faster recovery in aggregate demand,” the bank said in a statement on its website.

Retail-price inflation accelerated to an annual 9.9 percent in October, and the central bank says the consumer-price index probably rose to more than 9 percent. The bank has pledged to stick with its inflation target of 4.5 percent, plus or minus 1.5 percentage point, at the end of 2011.

Its 2010 target of 6 percent, plus or minus two percentage points, is likely to be exceeded on food price volatility and stronger economic growth driven by consumer spending.

Above Target

“Annual inflation will remain above” the target band in the coming months and “the interest increase by 100 basis points is needed to make sure that inflation returns to the band” in 2011 and 2012, the bank statement said.

The rate increase followed a series of central bank interventions in the foreign-exchange market to curb the losses in the dinar, the currency which has already lost 11 percent against the euro this year so far.

Narodna Banka Srbije sold 95 million euros ($130.5 million) on the interbank market since the start of the month and more than 2.3 billion euros since the start of the year, as the dinar suffers from a lack of foreign capital inflows and corporate external debt repayments.

The dinar traded in a range between 106.95 and 107.15 to the euro after the rate announcement, barely changed against morning levels, according to Bloomberg data.

The central bank raised its policy rate amid pressures on dinar-denominated debt in the local market, with “weak investor demand to subscribe the sovereign debt amid uncertainties over the magnitude of monetary tightening,” Hypo Alpe Banka said in a note to clients before the announcement.

The government borrowed today almost 5 billion dinars in six-month Treasury bills at an average yield of 13 percent, 0.2 percentage points more than in late October at an auction of the same maturity.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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