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By Gordana Filipovic
BELGRADE, Jan 14 (Reuters) - Serbia's central bank governor Radovan Jelasic said on Wednesday that lower inflation warranted a cut in the key policy rate, but the decision depended on fiscal policies as well as a weakening economic growth outlook.
The bank holds its monetary policy meeting on Jan. 22, a week after the International Monetary Fund is due to endorse a $520 million stand-by loan for the Balkan nation, whose currency has lost more than 20 percent since October.
"As long as the inflation rate is lower, the chance for the National Bank of Serbia to cut (the two-week repo) rate is higher," Jelasic told B92 television. "My personal stand is that the rate should be cut."
The bank has kept the two-week repo at 17.75 percent since late October. It has been concerned about a mixed outlook for inflation and the dinar, which has tumbled as investors have sold eastern European assets due to the global credit crunch.
The dinar traded in a 92.00-93.00/euro range in the early afternoon. Dealers said a lower rate would be neutral for the dinar and a sizeable cut would boost lending to corporates, which are finding it increasingly difficult to borrow abroad.
A lower rate would also set a benchmark cost for future state borrowing in the local market to finance the fiscal gap.
After a 2.4 percentage point dip in December, inflation for 2008 ended at 6.8 percent, but the global financial turmoil has already weighed on Serbia's economy, with 2008 GDP growth estimated to have eased to 6.1 percent from 7.1 percent in 2007.
The government last month projected that growth would drop to 3.5 percent this year with inflation of 6-10 percent, based on new net borrowing of $3.9 billion in 2009.
But a leading economic think-tank said this week the economy was more likely to grow only 0.5 percent, with inflation at the top of the targeted band or 10 percent. The global crisis and lower capital inflows were seen as the main risks in 2009.
"If growth turns out to be lower than 3.5 percent, fiscal revenues will also be lower and then the question is what happens to the deficit," Jelasic said, adding that the IMF was unlikely to approve of any fiscal slippage.
Although the IMF initially urged Serbia to limit the deficit to 1.5 percent of GDP, the gap will be slightly higher, at 1.75 percent of GDP, to take into account previously agreed sovereign borrowing from international financial bodies, he said.
Asked about prospects for the weakening dinar, Jelasic said: "I don't know how much longer this can last and we will try to maintain stability by spending minimum amounts of money."
The falling dinar had to be viewed in the context of both domestic fiscal policies and the global financial turmoil, he said. The central bank could act only against daily swings, but not the trend, and aggressive interventions to prop up the dinar would have reduced the reserves to below 7 billion euros.
Hard currency reserves fell in 2008 by 1.5 billion euros to 8.14 billion at the end of December. The central bank spent money to bolster the dinar and add liquidity to banks. (Reporting by Gordana Filipovic; editing by Adam Tanner/David Stamp)