* Rate rise of 25 basis points tied to inflation, retail prices hike
* Future policy moves depend on inflation, fiscal consolidation (Adds background, context) By Aleksandar Vasovic
BELGRADE, Oct 9 (Reuters) - Serbia's central bank increased its benchmark interest rate , already the highest in the region, by 25 basis points to 10.75 percent on Tuesday, reflecting concerns over rising inflation and debt.
Other central banks in Central and Eastern Europe have cut rates over the past two weeks, as growth slows across the region, although Poland bucked the trend last week by keeping rates flat due to concerns over inflation.
"Considering that the increase of food prices and state-controlled prices is higher than expected and that inflationary expectations are on the rise, the Executive Board has decided to increase the benchmark rate to prevent the spillover ... to other prices," the Serbian bank said in a statement.
Serbian inflation in August rose to 7.9 percent, up from 6.1 percent in July, due to a poor harvest and the government's bid to finance its 2012 budget gap of 6.2 percent through a rise in value-added tax.
Serbian inflation will continue to rise until mid-2013 when it will begin to slide back to its target band of four percent, give or take 1.5 percentage points, the same as for 2012, according to earlier central bank estimates.
Serbia's deficit, inflation and rising social discontent have prompted the Socialist-nationalist coalition government that came to power in July to borrow more, including a Sept. 27 issue of a $1 billion Eurobond and a $1 billion loan from Russia expected for this year and next.
Serbia's total public debt this year is expected to reach 60 percent of GDP.
"The upward rate movement is beneficial for portfolio investors who will make profits on short-term maturities, but bad for budget and debt," said Djordje Djukic, a lecturer of economics with Belgrade University.
"The effects (of the rate hike) on inflation are very uncertain as the Serbian economy is highly monopolised and plagued by high production costs, low productivity and competitiveness," Djukic said.
In the statement, the bank said that future policy moves will depend on inflationary expectations, external influences and the effects of fiscal consolidation.
"In the future, low aggregate demand will have a strong disinflationary effect and positive efefects are also expected from fiscal stabilisation ... which will also aid lowering of inflationary pressures and pressures on (the dinar currency's) exchange rate," it said.
Of 10 analysts and traders polled by Reuters between Oct. 1 and Oct. 5 , three saw an increase of 25 basis points and two a 50 basis point rise to 11 percent. Five said the bank will hold the rate at 10.5 percent.
The dinar rallied versus the European common currency last month after domestic banks started issuing government-subsidised loans to aid exporters hit by the crisis in the euro zone, Serbia's main trade partner.
The dinar has been trading at an average of 115 dinars to one euro since, as opposed to an average 117.5 in the days before its recovery. By midday on Tuesday it traded at between 114.56 and 114.76 to one euro.
(Reporting by Aleksandar Vasovic; Editing by Catherine Evans and Anthony Barker)
Keywords: SERBIA RATES/