March 12, 2015 / 11:18 AM / 2 years ago

UPDATE 1-Serbia cuts rates to ward off deflation after IMF deal

* Central bank cuts rates 50 basis points to 7.5 pct

* First rate cut since November on back of IMF deal

* Bank sees increased interest in Serbia among investors (Updates with bank statement, background)

By Ivana Sekularac

BELGRADE, March 12 (Reuters) - Serbia's central bank cut its benchmark interest rate on Thursday for the first time since November to 7.5 percent, moving to ward off deflation and support economic growth on the back of a new IMF loan deal.

The cut - by 50 basis points - was in line with the expectations of seven of 14 bankers and analysts polled by Reuters. The reduction came on the heels of a new precautionary loan deal agreed last month with the International Monetary Fund.

The bank cited the IMF deal, government efforts to stabilise Serbia's finances and increased liquidity due to a policy of quantitative easing launched by the European Central Bank, which, it said, "will all result in increased interest in Serbia among investors."

In a statement, the bank said expectations that inflation will move to within the bank's target range "open the door for monetary policy to make a contribution to overall economic growth."

The three-year IMF standby programme, worth 1.2 billion euros ($1.27 billion), has brought some relief for the dinar currency and should serve as an anchor for tough public sector spending cuts aimed at saving 1.3 billion euros by 2017 and capping public debt.

Serbia's government has pledged to reduce its bloated public sector, which employs almost half of the country's workforce, and offload hundreds of loss-making state firms.

Serbia's inflation and growth data also encouraged the bank to lower borrowing costs.

Data released on Thursday showed annual inflation stood at 0.8 percent last month, up on January's figure of 0.1 percent but still far below the bank's target of 4 percent, plus or minus 1.5 percentage points. On a monthly basis it turned to deflation of 0.2 percent in January but bounced back to 0.9 percent inflation in February.

Serbia's economy is forecast to contract 0.5 percent this year having shrunk 1.8 percent in 2014.

The bank's next rate-setting meeting is scheduled for April 9.

$1 = 0.9423 euros Additional reporting by Aleksandar Vasovic; Editing by Matt Robinson/Gareth Jones

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