UPDATE 1-Chile cenbank president: time to raise rate near

* De Gregorio: Time to start rate upcycle is near

* Gradual withdrawal of stimulus to hit inflation target

* Monetary policy to still help stimulate economy (Updates with quotes, background)

SANTIAGO, May 17 (Reuters) - Chile's central bank needs to gradually withdraw monetary stimulus to help meet inflation targets, and the time to start raising its key interest rate is near, bank president Jose De Gregorio said on Monday.

De Gregorio, speaking to a seminar, said, however, that monetary policy would continue to stimulate the economy in coming months and quarters in the wake of a devastating February earthquake.

"Monetary policy continues to be very expansive and hitting our inflation goal requires a gradual withdrawal of this expansionary (policy)," De Gregorio said.

"That said, monetary policy will continue to be highly stimulative in the coming quarters," he added. "Chile's economy should continue with its recovery in the coming quarters."

The bank held its benchmark rate steady for a 10th month in a row at 0.50 percent on Thursday, as expected, but said the time to normalize monetary policy was near -- signaling an imminent rate hike.

The bank is widely seen starting to raise rates CLINTR=ECI from their "minimum" level as soon as June or July. It is lagging both Brazil and Peru, which have both already raised rates.

Chile led the regional pack during a rate-slashing cycle last year amid the global financial crisis.

The central bank has held its benchmark rate at the historic low of 0.5 percent since mid-2009, first to help the economy recover from the global financial crisis, and then from the ravages of the quake. For more see [ID:nN30167267].

A poll of analysts published by the bank on Tuesday showed the market expects the central bank's benchmark rate to rise to 1.75 percent by October. [ID:nN11261435]

The economy contracted 2.8 percent in March because of the quake, which killed hundreds of people, destroyed towns and hit the fruit, steel and forestry industries in south-central Chile; the mainstay copper mining industry was mostly unscathed.

Industrial output plunged 17.4 percent in March from a year earlier because of the quake, the biggest drop in at least 20 years, but it is seen bouncing back later in the year. [ID:nN28181261] [ID:nN0560789] (Reporting by Simon Gardner and Antonio de la Jara; Editing by Padraic Cassidy)