Food prices drive Serb inflation to double digits

Fri Oct 12, 2012 8:06am EDT

* Food prices in September rise by 5 pct

* Monetary measures to have little impact on inflation

* Dinar strengthening driven by subsidies, investors

By Aleksandar Vasovic

BELGRADE, Oct 12 (Reuters) - A major increase of food prices in September, following a poor harvest and long drought, has driven Serbia's inflation to 2.3 percent and the annual figure to double digits, the statistics office said on Friday.

The drought in Serbia almost halved corn yields and seriously affected sunflower, sugar beet and soy beans, prompting government to limit exports. This also led to a higher demand for cattle fodder and a hike in meat and milk prices.

The prices of food and non-alcoholic beverages last month rose by 5 percent on the month, followed by hikes in transport with 2.4 percent and household equipment and maintenance items with 2 percent, the statement said.

Rising inflation, now at 10.3 percent, and a mounting debt, seen at some 60 percent of gross domestic product (GDP) by end-2012, prompted the central bank this week to cut this year's growth forecast to -1.5 percent from the previously seen -0.5 percent.

In a bid to tame concerns over inflation and debt, the bank this week also raised its benchmark rate, already the highest in the region, by 25 basis points to 10.75 percent.

The bank said the inflation would rise further to 12 percent this year and continue to grow until the first half of 2013 when it should start sliding back to its target band for this year and next of 4.5 percent, give or take 1.5 percentage points.

"October inflation will surely go up due to an increase of taxes and excise duties, but I don't see higher prices in November when (inflation) will likely stagnate and remain like that until the end of 2012," said Sasa Djokovic of the Belgrade-based Institute for Market Research (IZIT).

He said the government's move to narrow the budget gap by raising value-added tax would accelerate inflation in October. He voiced doubt about how effective the rate hike would be.

"Monetary measures have little impact as inflationary pressures are not coming from the monetary sphere but from disbalances in Serbia's monopolised economy," Djokovic said.

STRONGER DINAR MAY LOWER INFLATION

The Serbian dinar has gained 1 percent this week and was quoted at 111.9 on Friday, according to Reuters data. [Id: nL5E8LC4VG]

Dealers said loans for exporters, which the government has been subsidising since September, as well as stronger demand for the currency by portfolio investors were boosting the dinar, which could lower inflation to a degree.

"The dinar strengthening could lower import prices but it is probably a short-term event as the currency is not backed by exports," said a trader with a Belgrade-based commercial bank.

The dinar sank to a record low of above 119 per euro in August, after a new law on the central bank eroded the institution's independence, rattled markets and drew criticism from the European Union and the International Monetary Fund.

TO assure investors, Serbia needs to secure a new loan deal with the IMF, which in February froze its 1 billion euro ($1.29 billion) deal with the country over inflated spending.

Last month, the lender told Belgrade to restore the autonomy of the central bank and rein in spending before any new loan talks. Serbia instead sought to borrow from sovereign lenders including Russia and China And last month issued a $1 billion-worth eurobond. ($1 = 0.7726 euros) (Reporting by Aleksandar Vasovic; Editing by Zoran Radosavljevic/Jeremy Gaunt)