(Releads, adds central bank intervention)
By Gordana Filipovic
BELGRADE, Jan 22 (Reuters) - Serbia's central bank cut its key policy rate 125 basis points to 16.5 percent on Thursday, sending the dinar down three percent to a new record low in late trading, but central bank intervention stemmed the losses.
The currency market had expected a smaller rate cut and a boost to liquidity to bolster growth, already at a five-year low.
The central bank sold 51 million euros to support the dinar which reached a new all-time low of 96.14/euro.
After the intervention the dinar made up all the ground it had earlier lost. It has fallen more than 20 percent since October on investor flight from east European assets.
Eaarlier, central bank governor Radovan Jelasic told a news conference the bank was already considering measures to make corporate borrowing cheaper and to keep the dinar stable in a year when capital inflows looked likely to decline.
"If the Q4 growth was only 2 percent, which is our preliminary estimate, then the full year (2008) growth will be 5.4 percent," Jelasic said. "This comes with a significant decline in exports and imports, which cuts down our trade and current account deficits."
The Serbian statistics agency has estimated full-year GDP growth at 6.1 percent and the government saw it at 6.3 percent.
Explaining the interest rate cut, Jelasic cited falling domestic demand, lower credit activity and wages, economic slowdown, cheaper food and fuel and easing inflationary expectations.
"The disinflationary impact has outweighed inflationary pressures, allowing a one-time rate cut," Jelasic said. "It will depend on fiscal policies and hikes of regulated price as to whether this (cut) becomes a trend."
The central bank lowered its benchmark, 2-week repo rate
Jelasic had already signalled before Thursday that he favoured a rate cut. A Reuters poll of 15 analysts published on Wednesday found most expected a rate cut of 100 basis points, although some predicted an even greater move.
Jelasic said the central bank would update reserve requirements by the middle of next month to improve dinar liquidity, which banks could then use only for loans, preferrably at a single-digit interest rate.
The bank was also considering introducing by March 1 a facility to allow banks to immediately exchange hard currencies for dinars or vice versa with the central bank. Such a move could help liquidity without triggering large swings in the exchange rate if they were to trade in the market.
The central bank chief said Serbia would need 3.9 billion euros in 2009 to finance its current account gap of an estimated 16.1 pct of GDP, on top of expected 1.7 billion euros in foreign investment this year.
"In the absence of those inflows, the government will have to cut quickly and resolutely or change its fiscal spending plans to keep growth on track," Jelasic said. "If not, the adjustment will arrive through the weakening of the dinar and/or decline in hard currency reserves."
At $8.1 billion in January, the official reserves covered six months of imports, double what the bank would consider critical, before tapping the International Monetary Fund.
The IMF has approved a $520 million stand-by deal for Serbia and Jelasic said drawing the funds immediately would mean that Serbia's policies were not on track. (Additional reporting by Aleksandar Vasovic; Editing by Ian Jones)