BELGRADE: High food prices prompted Serbia's central bank to raise its key repo rate by 25 basis points to 12.50 percent on Thursday, a move in line with market expectations.
The bank said it expect food costs to drop soon.
"The executive board has evaluated that the inflationary pressures of food prices are of a one-time nature and that they will significantly drop with the new agricultural season from July 2011," the bank said in the statement.
"Aggregate demand in the upcoming period will also have a deflationary effect."
Nine out of 13 analysts and currency dealers polled by Reuters earlier this week forecast a rate rise to a median of 12.5 percent following recent rises in electricity and food prices.
"The (central) bank wants to use high interest rates to make its dinar repo papers more attractive to commercial banks which are either purchasing them or government dinar treasury bills," said Sasa Djogovic of Belgrade's Institute for Market Research.
"To do that banks have to sell euros, thus strengthening the domestic currency."
The Serbian dinar has appreciated nearly 4 percent against the euro in 2011 on the increased offer of domestic T-bills and sales of euro-indexed bonds.
The government wants to secure more funds to finance its budget gap agreed with the International Monetary Fund at 4.1 percent of gross domestic product this year.
"Serbia needs investments to secure the real inflow of revenues and such a monetary policy is only a short-term measure," Djogovic said.
Belgrade is seeking more investors to strengthen the European Union applicant country's development and boost employment ahead of elections tentatively slated for 2012.
But in March, Prime Minister Mirko Cvetkovic said the country will likely decide not to sell state-run Telekom Srbija to Telekom Austria if the firm refuses to pay the minimum price of 1.4 billion euros ($1.9 billion).
Earlier this month, the head of the state debt agency said Serbia will turn to 500 milllion euros of eurobonds to finance the budget gap this year if the telecom sale fails.
By the end of 2011 Serbia also wants to issue a total of about 280 billion dinars (187 million euros) worth of T-bills to refinance earlier issues and cover the budget gap.
Last month the central bank also increased its key rate by 25 basis points, citing heightened inflationary pressures, after keeping it on hold in February and following a half percentage point hike in January.
On Thursday the bank said that the latest 25 basis point increase reflects its determination to secure its inflation target of between three and six percent in 2011. Serb inflation in February was 12.6 percent.
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