Serbia Raises Main Rate to Tame Accelerating Inflation

Serbia’s central bank raised its benchmark interest rate for a fifth time since June to tame inflation after it accelerated above 10 percent.

The Belgrade-based Narodna Banka Srbije lifted today the one-week repurchase rate 0.2 percentage point to 10.95 percent, the highest since September last year. Twelve economists in a Bloomberg survey predicted a quarter-point increase, one expected a half-point boost and eight forecast no change.

“Monetary-policy tightening aims to counter heightened inflationary pressures and to prevent the spillover of the effects of price increases, notably food, to other prices,” the bank said in a statement, adding that the increase “should contribute to the drop in year-on-year inflation next year and its retreat within the target band by the end of 2013.”

Serbian policy makers are seeking to damp inflation that rose to 10.3 percent in September, the highest since August last year. That contrasts with regional peers in Hungary, the Czech Republic and Poland, where central banks are following the U.S. and U.K. with cuts aimed at halting an economic slowdown amid Europe’s debt crisis.

The dinar traded at 112.7020 against the euro at 12:51 p.m. in Belgrade, 0.6 percent up on the session, according to data compiled by Bloomberg.

The National Bank of Serbia began raising the benchmark rate in June from 9.5 percent citing elevated inflationary expectations and higher-than-expected growth in food and administered prices.


The government, led by the Socialists of late Serbian strongman Slobodan Milosevic whose rule in the 1990s was marked hyperinflation and currency denominations, is seeking to curb price increases and restart growth. Serbian unemployment is among the highest in Europe, with one in four out of work.

The dinar was Europe’s worst-performing currency in the first half of 2012 due to capital outflows, low foreign-direct investment and weaker exports.

The Cabinet of Prime Minister Ivica Dacic, in office since July 27, offered subsidies to banks to encourage cheaper lending to cash-starved companies, forcing lenders to sell euros and unleashing the appreciation trend in a thin foreign-exchange market driven by cash flows rather than fundamentals. The dinar has gained 4.6 percent against the euro since then, according to data compiled by Bloomberg.

Price Growth

Inflation has been quickening since April, when it fell to a 30-year low of 2.7 percent due to rising food prices amid drop in farm output. The central bank sees inflation near 12 percent in December, more than double its official end-2012 target of 4 percent, plus or minus 1.5 percentage points.

Price growth has accelerated even as the economy fell into its second recession in three years. Gross domestic product has declined for three quarters, dropping 2.2 percent in the three months through September from a year earlier, according to preliminary data.

The government sees the economy shrinking 1 percent this year before rebounding to 2 percent growth in 2013, led by exports of Fiat SpA cars and foreign investment.

Fiscal Policies

The central bank has repeatedly said the pace and scope of tightening will depend on fiscal policies. The government plans to narrow the fiscal gap to 3.6 percent of GDP in 2013 from 6.7 percent this year and balance the budget by 2016, according to a draft budget.

The planned cutbacks and the way the government handles the central bank’s autonomy will be key to Serbia’s bid to persuade the International Monetary Fund to approve a new loan for the Balkan state.

The Washington-based lender suspended a $1.3 billion loan in February after the government slipped on agreed fiscal targets ahead of May 6 general elections. An IMF mission will arrive in Belgrade on Nov. 13 for the first stage of loan talks and return by February after evaluating the 2013 budget and deficit-cutting measures.

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