UPDATE 1-Chile central bank holds key rate steady at 5 pct

Thu Sep 13, 2012 6:45pm EDT

* Bank juggling firm local growth, external threats

* Market sees rate held at 5 pct in near future

* Chile slowdown so far softer than expected

* Bank cites strong Chilean peso in statement

By Anthony Esposito

SANTIAGO, Sept 13 (Reuters) - Chile's central bank held its key interest rate steady at 5.0 percent as expected for an eighth straight month on Thursday as healthy economic growth and demand at home counterbalance an unwelcome global backdrop.

Chile, the world's largest copper producer, has been preparing for a slowdown in global demand, especially from China, its main trade partner and top metals consumer, but its small, export-dependent economy has fared better than expected.

"Domestically, output and demand indicators have evolved around trend," the labor market remains tight, and annual inflation, as well as core inflation, are below the central bank's 3.0 percent policy horizon target, the bank's post-meeting communique said.

"Global financial conditions have improved and the financial tensions in the euro zone have moderated after the announcements of the European Central Bank. However, there is still uncertainty about the region's performance and a resurgence of tensions in coming months cannot be ruled out," the bank added.

The monetary authority also highlighted that the Chilean peso "has strengthened," but did not elaborate. The local currency has appreciated around 10 percent this year against the U.S. dollar, sparking market talk the bank could launch another foreign exchange intervention to stem further strengthening.

But bank president Rodrigo Vergara said last week that existing "worry" over the strong Chilean peso did not yet warrant intervention.

The peso closed at 472.70 per dollar on Thursday, a fresh one-year high.

"We weren't anticipating any surprises (on rates). Considering the strength the Chilean economy is still exhibiting, the recovery of inflation and external uncertainty, a change in the neutral monetary policy stance is highly unlikely. For now we don't see any changes until 2014," said Alejandro Puente, chief economist at BBVA Chile in Santiago.

The central bank, in its much anticipated quarterly Monetary Policy Report last week, said the key rate is within a range considered neutral, suggesting it would maintain a wait-and-see stance.

A neutral interest rate, in theory, should neither spur nor curb economic growth - all other factors being equal.

Chilean economic activity grew 5.5 percent on the year in the second quarter, boosted by domestic demand, which jumped 7.1 percent.

Inflationary pressures, meanwhile, have eased, with inflation in the 12 months to August at 2.6 percent, just below the central bank's 3 percent policy target.

Two central bank polls this week showed traders and analysts expect the rate to be at 5.0 percent in coming months.

Traders polled by the bank in August predicted the rate would be at 4.75 percent within six months, but have since nixed bets on a cut as domestic economic data remains solid.

Lower export revenue, which prompted Chile in August to post its largest trade gap since the height of the global financial crisis, has to date been one of the most salient indications of decelerating global demand.

Even so, finance minister Felipe Larrain said on Tuesday Chile's government isn't "too concerned" about any effect on the current account and expectations for a deceleration of the local economy.

Elsewhere in the region, Brazil's central bank signaled it was wrapping up a year-long policy easing cycle, but left the door open for a final rate cut as it sees inflation remaining under control, according to minutes released last week from its most recent monetary policy meeting.

Colombia's central bank lowered its benchmark interest rate for the second consecutive month in August in a widely expected move to bolster the economy as the global slowdown crimps overseas sales and weak sentiment slows consumer spending.

Peru's central bank held its benchmark interest rate steady at 4.25 percent for the 16th straight month last week, betting inflation would cool to within its target range by the end of the year.

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