Serbia's central bank raised its key policy rate by another 20 basis points to 10.95 percent to reduce growing inflationary pressure and prevent higher food prices from spilling over to other prices.
The National Bank of Serbia, which has raised rates five times this year for a total increase of 1.45 percentage points, said this increase should help reduce inflation to the bank's target by the end of 2013, dropping its warning from last month that it may have to raise rates further.
"Together with the measures taken by the National Bank of Serbia earlier, this upward revision of the key policy rate should contribute to the drop in year-on-year inflation next year and its retreat within the target bank by the end of 2013," the bank said after a meeting of its executive board.
The bank targets inflation of 4.0 percent, plus/minus 1.5 percentage points.
Unlike last month, the bank did not warn of further rate hikes, indicating that it may wait and see how its tightening since June has affected inflation before changing rates further.
Inflation in Serbia has been rising for five months in a row, hitting 10.3 percent in September and sharply above the bank's upper tolerance range, mainly due to higher food prices from a bad harvest.
"Monetary policy tightening aims to counter heightened inflationary pressures and to prevent the spillover on the effects of price increases, notably food, to other prices," the bank said.
But the central bank said the effect of the higher prices should ease with the new agricultural season and as base effects of higher administered prices and VAT rises disappear.
"Persistently low aggregate demand will continue to produce a disinflationary effect," the bank said, adding that the government has also sent positive signals about its commitment to fiscal consolidation.
Serbia's second quarter Gross Domestic Product rose 2.1 percent from the previous quarter, but compared with the same quarter last year the economy shrank by 2.2 percent.
Serbia's central bank started the year by cutting its policy rate by 25 basis points but then started raising rates from June. Including the January rate cut, rates have been raised by 120 basis points year to date.