Serbia's central bank increased borrowing costs by 25 basis points for a fifth meeting as it battles to slow Europes second-fastest inflation even as the economy heads toward recession.

The Narodna Banka Srbije raised the one-week repurchase rate a quarter-point to 11.5%, the bank said Thursday in a statement on its website. The bank began raising its benchmark rate last June from 9.5%.

The monetary-policy reaction is directed at preventing spillover effects of regulated price increases to other prices through higher inflationary expectations, the bank said in an e-mailed statement. Policymakers also want to ensure that increased dinar liquidity doesnt put pressure on prices or the currency, the bank added.

The central bank cited a rise in annual inflation in December to 12.2% from 11.9% in November, well above its target range of 4.0% plus or minus 1.5 percentage points.

The NBS is at odds with other central banks in the region, which are cutting rates in order to combat economic slowdown. Yet Serbia too is in recession, with GDP forecasted to have contracted 2% in 2012, but the coalition government says it sees the economy rebounding in 2013 with 2% growth even as it battles to cut a budget shortfall of around 6%.

The bank says it expects inflation to continue to rise until mid-2013. On Thursday it said it hoped the government's fiscal consolidation plan would yield results and help bring down inflation.

Source: bne