UPDATE 1-Serbia's central bank says Ukraine crisis, austerity measures to drive future rate cuts

Wed May 14, 2014 4:45am EDT

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(Adds central bank quotes)

BELGRADE May 14 (Reuters) - The scope of future Serbian monetary policy easing will be determined by the effects of the Ukrainian crisis and how the government implements its fiscal consolidation measures, a central bank report said on Wednesday.

Serbia's central bank cut benchmark rate by 50 basis points to 9 percent last week on slowing inflation and after the new government pledged to cut spending.

In its quarterly report on inflation the bank said future rate cuts will depend on potential investors' risk aversion caused by crisis in Ukraine as well as on the success of the government's austerity measures.

"The Ukrainian crisis could have negative effects on Serbia through a (external) price rise of energy and food," the bank said. "Also it could cause risk aversion among investors and their decision to reduce exposure in emerging markets."

It said the government's fiscal cuts will hamper domestic demand in 2015 and keep growth below its forecast of 2 percent, but it did not give more precise figure. The bank kept is gross domestic product forecast for this year at 1 percent.

In its quarterly report on inflation the bank said it expects inflation to remain around the lower end of its target range between 2.5 and 5.5 percent.

April inflation stood at 2.1 percent.

"The government hinted fiscal consolidation measures will be stronger than previously expected," the bank said adding more details on the measures will be announced later in the year.

"(The stronger measures) will result in decline of spending and strengthening of disinflation factors."

Serbia's consolidated budget deficit is forecast at 7.1 percent of national output, but analysts warn it will exceed 8 percent unless additional savings are made.

Prime Minister Aleksandar Vucic who took over last month pledged root-to-branch reform to overhaul the ailing economy and committed to painful spending cuts in the bloated public sector

He announced a 10 percent wage cut for all public sector workers as of July and said his government will consider later this year whether a pension cut would be necessary as well to cap the deficit.

Serbia is in talks with the International Monetary Fund on a 3-year precautionary loan deal that would reassure investors the EU candidate country will get its finances in order and be able to service the debt that reached 63 percent of national output. (Reporting by Ivana Sekularac; Editing by Toby Chopra)

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