September 7, 2017 / 10:33 AM / 10 months ago

UPDATE 2-Serbian central bank cuts benchmark rate to 3.75 pct

(Adds quotes, details)

By Aleksandar Vasovic

BELGRADE, Sept 7 (Reuters) - Serbia’s central bank surprised markets by cutting its benchmark interest rate on Thursday by 25 basis points to 3.75 percent to boost lending and spur growth, after 13 months of keeping it steady.

All 10 analysts and traders polled by Reuters this week and last said the central bank would keep the rate on hold.

Last month, the bank said uncertainties in international markets motivated it to keep the rate steady.

Weak growth appeared to be the key to the bank’s decision, particularly after Prime Minister Ana Brnabic’s remarks that the economy could expand by just 2.5 percent this year, below the previously foreseen 3 percent.

Brnabic also said Serbia may not seek a new loan from the International Monetary Fund after the expiration of a current 1.2 billion euro ($1.4 billion) standby arrangement in 2018.

The central bank’s Executive Board said that low inflation and good fiscal performance motivated it to cut the rate.

“By lowering the benchmark interest rate ... the Serbian central bank gives additional support to lending activity and economic growth,” it said.

The bank said lower dinar-indexed import prices and a drop of country’s risk premiums have contributed to lower inflationary pressures.

The bank has repeatedly said it expects inflation to remain within its 2017 target of 3 percent give or take 1.5 percentage points. July inflation stood at 3.2 percent, down from 3.6 percent a month earlier. The Statistics Office will release August inflation data on Sept. 12.

The rate cut came too late and would have little real impact on growth in 2017, said Dejan Soskic, bank’s former governor and lecturer of economics at the University of Belgrade.

“This ... does not send a message about consistency and credibility to financial markets,” Soskic told Reuters.

“On the other hand, if short-term investors see this measure as an announcement of possible rate cuts in the future, it may have impact on movements on the currency market.”

The dinar has remained strong against the euro since the bank’s last policy move, bolstered by foreign currency inflows for investments and remittances, but dealers and traders have said the currency was likely to weaken seasonally later in the year.

After the rate decision, the dinar the dinar traded at the rate of 119.60 to euro, 0.2 percent down from the previous close, Reuters data showed. It further weakened to 119.75 later in the day. (Reporting by Aleksandar Vasovic; Editing by Toby Chopra)

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