Thursday, August 9, 2012

Serbia hikes rate 25 bps to dampen inflation expectations

     Serbia's central bank, facing political and economic challenges, raised its policy rate by a further 25 basis points to 10.50 percent in a bid to dampen inflationary expectations.
    The Belgrade-based Narodna Banka Srbije, which recently lost its former governor and three other members of its governing council following new laws that tighten political influence over the bank, said inflation had approached the upper bound of its tolerance band and prices were expected to rise further due to higher food prices from a poor harvest and higher administrative and import prices.
     "In view of such developments and an increase in the country's risk premium, the Executive Board voted to raise the key policy rate in order to moderate inflationary pressures and act preemptively to contain inflation expectations," the central bank said in a statement.
     The bank also said the "degree of future monetary policy restrictiveness" would depend on fiscal consolidation, food prices and global developments, indicating a bias toward tightening rates further.
     It is the third month in a row that the bank has raised rates for a total rise of 100 basis points.
     The annual inflation rate in Serbia rose to 5.5 percent in June, hitting the upper limit of the bank's target range of 4.0 percent, plus or minus 1.5 percentage points.
    "Inflation is expected to peak in the first half of 2013 and the start retreating towards the target," the bank said.
    The meeting of the bank's board was the first under the new governor of Jorgovanka Tabakovic, who was appointed on Monday. On Tuesday Standard & Poor's cut Serbia's credit rating by one notch to BB- due to its budget deficit and worries over the central bank's independence.


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