Serbia Seen Raising Rate Further to Bring Down 2013 Inflation

Serbia’s central bank will probably raise its benchmark interest rate for the sixth time since June as it battles stubbornly high inflation.

The Belgrade-based Narodna Banka Srbije will lift its one-week repurchase rate tomorrow by as much as 55 basis points according to 19 of 24 economists in a Bloomberg survey. Five expect no change in borrowing costs.

“Inflation will remain high next year, certainly above target because regulated prices will rise after being kept on hold this year,” said Ljiljana Grubic, a Belgrade-based analyst with Raiffeisenbank AD.

Serbian rate-setters are trying to damp inflation, which accelerated to 12.9 percent in October. That contrasts with other monetary authorities in eastern Europe, who are following central banks in the U.S. and U.K. with cuts to halt an economic slowdown as Europe fights a sovereign-debt crisis.

The National Bank of Serbia, which has raised its repurchase rate by a total of 145 basis points, or 1.45 percentage points, since June to 10.95 percent, has repeatedly cited elevated inflationary expectations, along with higher-than-expected growth in food and administered prices.

Target Band

The November inflation reading “resulted from a low base last year” and a “decline in the annual inflation rate is expected as of the second quarter of next year, with a return to the target band by the end of 2013,” according to a statement posted on the central bank’s website yesterday. The central bank targets inflation of 4 percent, plus or minus 1.5 percentage points, through 2014.

Inflation in Serbia has been quickening since April, when it was at a 30-year low of 2.7 percent, led higher by rising food prices following a decline in domestic agricultural output.

The central bank’s problem is that inflation “isn’t monetary by nature,” said Jasna Atanasijevic, chief economist at the Belgrade-based Hypo Alpe Adria Banka AD. Price growth has been triggered by increases in the sales tax and excise duties, or from higher costs of items such as heating and transportation, she said.

Monetary Character

“There is nothing to point to a monetary character of inflation because private consumption is not rising,” she said.

The central bank could take advantage of a stable dinar, declining yields on government debt, or liquidity from sales of Eurobonds in September and November, as well as weak economic activity to leave rates unchanged, Grubic and Atanasijevic said. The central bank forecasts the economy to contract 2 percent this year before rebounding in 2013 on export growth, led by higher car and crude oil product sales abroad.

The central bank has repeatedly said that the pace and scope of cuts, as well as its policy bias depend on fiscal policies. The government plans to narrow the fiscal gap to 3.6 percent of economic output in 2013 from 6.7 percent this year and balance the budget by 2016.

Prime Minister Ivica Dacic, whose Cabinet took office in July, needs to convince the International Monetary Fund it is able to meet the budgeted fiscal targets and meet the lender next spring for a second round of talks on a new loan program.

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