Serbia's central bank raised its benchmark rate by another 25 basis points to 11.50 percent, its seventh rate rise since mid-2012, continuing its fight to contain inflationary expectations.
The National Bank of Serbia, which raised rates by 175 basis points in 2012, said headline inflation in December was again above its target range and core inflation of 8.2 percent was "relatively high" and higher administered prices had already been announced.
"The reaction of monetary policy is aimed at preventing transmission of the effects of growth of regulated prices to other prices through higher inflationary expectations," the central bank said in a statement, adding:
"The measures of the National Bank of Serbia will also prevent the increased dinar liquidity to affect the formation of inflationary pressures and the pressures on the foreign exchange market."
Serbia's inflation rate has been volatile and rarely within the central bank's target range in recent years. In December the inflation rate ticked up to 12.2 percent from November's 11.9 percent.
The central bank targets annual inflation of 4.0 percent, plus/minus 1.5 percentage points and it has been tightening policy since June to stabilize medium-term inflation and stem expectations.
In the months ahead, the central bank expects another rise in inflation due to higher administered and food prices, peaking in March of April, but inflationary pressures are then expected to subside due to low demand, the arrival of the new agricultural season that should have a positive impact on inflation, and the government's fiscal consolidation program.
The central bank expects the inflation rate to return to the "border of the target" by the end of 2013.
In 2008 Serbia's inflation rate fluctuated from a low of 8.6 percent to a high of 14.9 percent, in 2009 the range narrowed to 5.2-10.7 percent and in 2010 the range was 3.7-10.2 percent.
But in 2011 the range widened to 7.0-14.7 percent and in 2012 the range was 2.7-12.9 percent, with the high reached in October, largely due to the effect of drought on food prices.
Serbia's third quarter Gross Domestic Product contracted by 0.8 percent from the previous quarter for an annual shrinkage of 2.5 percent, higher than the 0.8 percent decline in the second quarter.
In 2013 GDP is projected to rise 2.5 percent, helped by exports after a projected contraction of 2.0 percent in 2012, mainly due to the"disastrous effect on this year's agricultural production" according to the November inflation report.