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Serbia Seen Raising Rates for Fifth Time in 5 Months Next Week

Serbia’s central bank will raise Europe’s highest benchmark interest rate next week for the fifth time in five months as it battles to keep inflation on target, a survey showed.

The Narodna Banka Srbije’s two-week repurchase rate will be increased by a half-point to 11 percent at a policy meeting on Dec. 9, according to 11 of 21 economists polled by Bloomberg, while six forecast the rate to rise a full-point to 11.5 percent. Four respondents expected no change.

The central bank has raised rates by 2.5 percentage points since August as inflation accelerated beyond its 2010 target band of 4 percent to 8 percent. Rising food prices, which account for 40 percent of consumer prices, are at the heart of the surge in inflation.

“Based on the retail prices index, it’s pretty certain that inflation will exceed even pessimistic expectations, justifying another rate increase,” Dusko Vasiljevic of the CEVES economic institute told Bloomberg.

Retail-price inflation was an annual 10.8 percent in October. The National Bank of Serbia said that translates into consumer-price growth of 9.6 percent for the month.

Near-term inflationary expectations are on the rise, according to the survey, with the median forecast for December inflation at 9.8 percent. By December 2011, inflation should ease to 7.2 percent, still above the central bank’s 2011 target of 4.5 percent plus or minus 1.5 percentage points.

Liquidity Issues

Policy makers have said that further policy tightening is likely through increased rates and other instruments, including the reserve requirement, which would further mop up liquidity at banks. A lack of dinar liquidity pushed the two-week Belgrade Interbank Offered Rate (BELIBOR) up to 11.70 percent on Dec. 2.

“The BELIBOR level is a reflection of the ongoing policy tightening process and of the banks’ reluctance to sell their surplus liquidity in the market in view of strong inflation and more rate hikes to come,” Djordje Djukic, a board member of AIK Banka AD. “It reflects the overall environment.”

The central bank’s two-week repurchase rate has failed to attract more liquidity into its repo operations, with the outstanding repo stock falling to 36.8 billion dinars ($452.1 million) this week, its lowest level in four-and-a-half years.

The bank has also been struggling to curb pressures on the dinar, a source of inflation pressure, selling 100 million euros since mid-November to offset seasonally higher energy imports on top of corporate demand for foreign currencies to repay debt abroad.

The dinar has lost almost 11 percent since January and about 40 percent since the start of the global financial crisis in 2008. The central bank this year has sold almost 2.5 billion euros to curb the dinar losses amid a shortage of fresh private- capital inflows.

According to the survey, the market bets on an end-2010 dinar rate of 108 to the euro compared with 109 dinars in a November survey, a level which is now expected to be tested in January in the new poll.

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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