March 14, 2018 / 11:20 AM / 9 months ago

UPDATE 1-Serbian central bank cuts benchmark rate to 3.25 percent

(Adds details, bank statement)

By Aleksandar Vasovic

BELGRADE, March 14 (Reuters) - Serbia’s central bank cut its benchmark interest rate by 25 basis points to 3.25 percent on Thursday, reacting to a strengthening currency and inflation that declined in the first two months of the year.

The move surprised markets. Only four of 12 analysts and traders polled by Reuters this week and last said the central bank would cut the rate by 25 basis points. Eight expected no change.

So far this year, Serbia’s currency, the dinar, has gained 0.6 percent against the euro, bolstered by an inflow of euros and sales of treasury bonds.

To curb the strengthening dinar, which it keeps in a managed float to the euro, the central bank so far in 2018 has bought 525 million euros ($647.27 million) and sold 180 million euros on local interbank markets.

Inflation stood at an annual 1.5 percent in February, the lower threshold of the central bank’s target range of 1.5 to 4.5 percent.

In a statement, the bank said that a slowdown of inflation which is expected to continue in the coming months motivated it to cut the rate.

“The decrease of the benchmark rate in an environment of low inflationary pressures will additionally support lending activity and economic growth,” it said.

The bank said it would remain cautious in its monetary policy moves amidst expectations that the U.S. Federal Reserves may raise rates again next week that could deter investors from emerging markets like Serbia.

Last month, the bank said that inflation, which remains inside its target band, and volatile international markets were the primary factors for leaving the rate unchanged.

Serbia’s economy grew around 2 percent last year and is forecast to grow 3.5 percent this year.

Following the rate decision, the dinar traded at 118.51, or 0.25 percent weaker than the previous close, Reuters data showed. (Reporting by Aleksandar Vasovic; Editing by Larry King;)

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