(Bloomberg) -- Serbia raised its main interest rate for the first time in nearly a decade, joining peers in eastern Europe that have been increasing borrowing costs for months to tackle accelerating inflation and the fallout from the war in Ukraine.
The National Bank of Serbia lifted the one-week repurchase rate to 1.5% from record low 1% on Thursday, exceeding the median forecast in a Bloomberg survey. Six analysts predicted a quarter-point increase, while four expected a rise to 1.50%. Eight saw no change.
“Inflationary pressures on the global and domestic markets are stronger and of more enduring character than previously expected,” the central bank said. “This requires additional tightening of monetary conditions in order to limit secondary effects on inflationary expectations.”
Serbia's first hike since 2013 follows a jump in headline inflation to 8.8% in February, the fastest in almost nine years and far above the central bank's tolerance band of 1.5% to 4.5%. Consumer-price growth is likely to quicken further, according to the survey.
The first in Europe to cut rates when the pandemic hit the continent in 2020, officials in Belgrade had sought to avoid swings in the benchmark and support a recovery that saw the economy expand 7.5% last year.
Serbia's rate setters have now joined the wave of monetary tightening in the region. Hungary, Romania, Poland and the Czech Republic have repeatedly raised their key rates while Serbia relied on other measures.
More Hikes
The monetary-policy tightening should help bring inflation “to a low and stable level in the medium term,” the central bank said. It also raised interest rates on its deposit and credit facilities, to 0.5% and 2.5%, respectively, and doesn't expect its measures to have a major impact on economic activity as large infrastructure projects and private consumption remain strong.
Multiple pressures have converged to trigger the hike. Soaring commodity prices are boosting inflation risks and Serbian bonds have been among the most affected in eastern Europe after Russia invaded Ukraine. Also, defending the dinar from depreciation has required robust central bank interventions in the past few months.
Keen to keep the dinar in a narrow range against the euro, the central bank was a net buyer of euros for most of 2021, but the balance of its trades reversed in October. It sold net 1.4 billion euros ($1.5 billion) over five months through February to fend off the downward pressures.
“We expect more hikes are coming and see the key rate at 2% by year-end,” Erste Group Bank AG analyst Mate Jelic said in a note. “Risks are skewed toward the upside as we forecast average yearly CPI this year close to double-digit area.”
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