(Adds more detail, market reaction, background)
By Gordana Filipovic
BELGRADE, Dec 22 (Reuters) - Serbia's central bank on Monday left its key policy rate on hold, resisting growing pressure to support its economy with policy easing after a slump in the dinar currency that helped drive the country to seek IMF aid.
All but two analysts in a Reuters' poll of 20 economists last week had forecast the bank to keep its main rate unchanged at 17.75 percent, as dinar depreciation pressures outweighed the improving inflation outlook.
But with the economy slowing to an expected 3.5 percent growth in 2009 from 6-7 percent in 2008 and headline inflation expected to fall into single digits around the turn of the year, officials have already signalled the bank is likely to lower borrowing costs soon.
"Considering the ongoing fiscal expansion and considering the exchange rate of the dinar, we still have to wait and see the impact on inflation and to what extent the dinar will stabilise," governor Radovan Jelasic told a news conference.
"As inflationary pressures are easing, the monetary board will not sit tight but (at some point) decide to cut the repo rate," he added.
The bank last raised its 2-week repo rate by 2 percentage points to 17.75 percent on Oct. 31 to fight double digit inflation and prop up the faltering dinar, the biggest loser among central and east European currencies hit by investor flight from emerging markets.
The dinar traded in an 85.10-86.20/euro range on Monday -- some 8 percent down on the year -- in thin interbank market and lean client demand, with traders reporting afternoon deals at 85.40/euro, up from its Friday's close of 85.9340/euro.
But the dinar was up for an uncertain 2009 with a lot sharper currency moves, as foreign exchange inflows were expected to slow down due to the global credit crunch, investor risk aversion and an expected decline in remittances.
"The exchange rate of the dinar will certainly be moving with bigger oscillations than previously," Jelasic said. The bank has spent 781 million euros since October to stem the falls in the dinar.
INFLATION TARGETING PACT
Jelasic said the bank expected consumer price inflation to hold within its 6-10 percent target range next year compared with 9.3 percent in November, after the bank and the government agreed an inflation-targeting as a long-term policy choice.
"As of 2009, the central bank will start targeting consumer price inflation," Jelasic said. The measure would also include regulated prices. "In order to reach the target, regulated prices can rise by up to 13 percent in 2009," he said.
The bank sees CPI at 9.2 percent in March, 8.6 percent in June, 8.5 percent in September and 8.0 percent in December 2009.
Price pressures were likely to stay strong in the first quarter of 2009 due to a strong euro, more expensive postal services, utilities, pharmaceuticals, and higher excise duties. Cheaper crude oil would partly offset the pressures, he said.
The inflation targeting pact with the government, a tight 2009 budget with a fiscal gap of up to 1.5 percent of GDP and a plan on the financial sector stability are the key conditions Serbia has to meet by mid-January for the IMF board of directors to approve a $516 million stand-by loan.
Jelasic said the government would set aside a dinar equivalent of nearly 500 million euros in the 2009 budget to ensure the stability of the financial sector and the central bank would be granting liquidity loans only to solvent banks. (Reporting by Gordana Filipovic; Editing by Patrick Graham and Andy Bruce)