* Cbank cites growing inflation risks
* Rate rise boosts dinar
* Raiffeisen bank says more restrictive policy expected
(Corrects year in paragraph 8)
By Ivana Sekularac
BELGRADE, Aug 5 (Reuters) - Serbia's central bank surprised markets by raising interest rates
The move, the first interest rate decision under new central bank governor Dejan Soskic, gave a small boost to the Serbian dinar, which hit a record low against the euro earlier this week and has lost about 11 percent this year.
"The executive board decided that the 0.5 percentage point hike of the repo rate is necessary to reach targeted inflation," the bank said in a statement.
A Reuters poll published on Wednesday showed 12 out of 14 currency dealers and bank analysts expecting an unchanged rate of 8 percent, with a rate hike more likely in September.
After the interest rate hike, the Serbian dinar picked up and traded in 105.77-105.97 range to the euro, from the morning level of 105.94-106.14 range, a trader said.
The Serbian unit of Raiffeisen International said after the announcement that more bank moves could be forthcoming.
"Once triggered, psychological inflationary pressures are hardly tackled via mild rational moves. Thus, in order to regain the shattered trust, we expect even sharper moves," it said.
The central bank estimated July consumer price inflation at around 5 percent, up from 4.2 percent in June and 3.7 percent in May. The bank targets 2010 inflation in the 4-8 percent range.
In an interview published earlier on Thursday Soskic said a one percent depreciation in the dinar increases inflation by 0.3 percentage point."In the future the bank will have to move towards a more restrictive policy to maintain targeted inflation," Soskic told the weekly NIN.
The bank had cut its benchmark interest rate by a total of 9.75 percentage points in a cycle of easing stretching back to January last year, with the last cut in May bringing it down to 8 percent.
MOVE IN RIGHT DIRECTION
Raising interest rates is clearly an effort to attract more investors to dinar investments, such as bond investors looking for higher yields. Yet the unstable dinar has deterred many this year.
Serbia's currency has fallen more than any other country in Europe in 2010, boosting exports but creating a risk that government borrowing costs will rise as investors grow wary about dinar treasury bills.
Sojan Stamenkovic, an economist and member of Serbian prime minister's economic council, said the central bank move was aimed to boost the dinar.
"I am not sure how successful it will be, we'll see, but it's a move in the right direction," he told Reuters.
He said he was not confident the move would draw more investors to invest in dinar treasury bills that are used to finance the budget deficit.
"The problem with our exchange rate is that we have a negative credit balance, when you exclude the IMF credits," he said.
Serbia's economy remains weak and the International Monetary Fund expects 2010 growth of just 1.5 percent, after a 3 percent contraction in 2009.
The impact from higher interest rates on Serbia's growth may be less than in many countries as banks make the overwhelming bulk of their loans in euros, not dinars.
Last month, Prime Minister Mirko Cvetkovic said Serbia's economy grew 1.8 percent year-on-year in the second quarter -- triple the pace of first-quarter growth. The central bank executive board will meet again on August 19 to decide on rates.
(Editing by Adam Tanner, Ron Askew)