BELGRADE – Serbia’s central bank surprised financial markets by cutting its key policy rate by 25 basis points yesterday in the wake of the dinar currency’s rally to three-year highs against the euro. Governor Radovan Jelasic said the central bank cut the two week repo to 9.5 percent because the strength of the dinar, which hit 76.88 to the euro on Friday, could ease inflationary pressures. The cut wrong-footed the market which had expected no change in policy. Just two months ago, the bank hiked by 25 basis points after monthly core inflation rose to a 21-month high. «The existing level of the exchange rate of 76.8 dinars to the euro can lead us to core inflation below our plan, and that’s why we have decided to cut the repo rate by 25 basis points to 9.5 percent,» Jelasic told journalists. The Serb economy has been growing strongly in recent quarters on the back of domestic demand that has been fueled by government spending and large public sector wage hikes. That, coupled with a poor harvest due to unfavorable weather conditions this summer and rising global energy prices, has boosted inflation. But the dinar’s strength should hold down import prices. The central bank said in a statement, «The existing level of the exchange rate allows for a careful reduction in the benchmark interest rate, considering the appreciation level and its impact on further price movements.» The dinar was off the three-year highs it hit last week in early interbank forex market trade yesterday, opening at 77.05/77.15 to the euro but later easing to 77.135/77.28 by 1242 GMT. Supported by ample hard currency liquidity, the dinar has gained more than 3 percent since the start of the year and economists say that each percentage point of its appreciation chops 50 basis points off inflation. The October price report is to be released later this week. The central bank said yesterday the cut should help keep core inflation this year on track with its forecast at around 4.5 percent, just above the lower end of its 4-8 percent targeted band.