Food prices drive Serb inflation to double digits


* 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 pricesin September, following a poor harvest and long drought, hasdriven Serbia's inflation to 2.3 percent and the annual figureto double digits, the statistics office said on Friday.

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

The prices of food and non-alcoholic beverages last monthrose by 5 percent on the month, followed by hikes in transportwith 2.4 percent and household equipment and maintenance itemswith 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) byend-2012, prompted the central bank this week to cut this year'sgrowth forecast to -1.5 percent from the previously seen -0.5percent.

In a bid to tame concerns over inflation and debt, the bank

this week also raised its benchmark rate , alreadythe highest in the region, by 25 basis points to 10.75 percent.

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

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

He said the government's move to narrow the budget gap byraising 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 inflationarypressures are not coming from the monetary sphere but fromdisbalances in Serbia's monopolised economy," Djokovic said.


The Serbian dinar has gained 1 percent this weekand was quoted at 111.9 on Friday, according to Reuters data.

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

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

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

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

Last month, the lender told Belgrade to restore the autonomyof the central bank and rein in spending before any new loantalks. Serbia instead sought to borrow from sovereign lendersincluding Russia and China And last month issued a $1billion-worth eurobond.($1 = 0.7726 euros)

(Reporting by Aleksandar Vasovic; Editing by ZoranRadosavljevic/Jeremy Gaunt)