Serbia's central bank raised its benchmark interest rate by 25 basis points to 11.75 percent, a surprise to most economists who expected rates to remain steady, with the National Bank of Serbia saying it expects inflation to begin to decline and reach its target by the end of this year.
The central bank, which last raised its rate in January following total rate rises of 175 basis points in 2012, said inflation should start to ease due to its tight monetary stance, a new agricultural season and the gradual disappearance of the base effect of last year's higher administered prices.
A stable foreign exchange rate, lower inflationary expectations and low demand will also have "a strong disinflationary impact," the central bank said in a statement.
Serbia's inflation rate rose to 12.2 percent in December from November's 11.9 percent, which was down from a recent peak of 12.9 percent but still well above the central bank's target of 4.0 percent, plus/minus 1.5 percentage points.
Serbia's Gross Domestic Product contracted by 0.8 percent in the third quarter from the second quarter for annual shrinkage of 1.5 percent, the fourth quarter in a row with a shrinking economy.