WRAPUP 2-Chile annual inflation slows to 0.9 pct, rate cuts eyed
* Chile May CPI flat, below forecasts for 0.1 pct rise * May trade balance widens on record export revenue * Interest rate cut a 'viable option' - finance minister By Antonio De la Jara and Felipe Iturrieta SANTIAGO, June 7 (Reuters) - Chile's May inflation rate was zero percent, sending the annual rate down to at least a two-year low, the government said on Friday, bolstering bets that the central bank will cut interest rates in coming months to stimulate flagging economic growth. Chile's benchmark interest rate has been frozen at 5 percent since January 2012, and on Friday, after the inflation data was released, the country's finance minister, Felipe Larrain, said a rate cut was a "viable option." The bank is seen holding its key interest rate on Thursday, though low inflation and slowing economic growth will likely precipitate a rate cut by August, a Reuters poll showed later on Friday. Central bank data also released on Friday showed Chile's trade surplus widened to $1.377 billion in May as export revenue jumped to an all-time record and imports barely budged. The peso closed 0.62 percent stronger on Friday, though traders said expectations of a rate cut limited gains. Tame inflation and a sharper-than-forecast economic slowdown led the central bank to consider lowering its key rate in May and could keep this option alive for the next central bank monetary policy meeting on June 13. "Clearly today a rate cut is an option that wasn't present a few months ago," the finance minister told reporters after Friday's data was released. "Today it's a viable option," he said, adding inflation would pick up in coming months. Larrain sits as an observer - but not a voting member - of the central bank monetary policy committee. In May, the consumer price index was unchanged - showing in effect zero inflation for the month. It came in below a forecast 0.1 percent rise, as falls in prices of housing, water, electricity and fuel were offset by increases in foods and non-alcoholic beverages, the INE statistics agency said. Core inflation was 0.1 percent. Inflation in the 12 months through May came in at 0.9 percent, below the bottom end of the central bank's 2 percent to 4 percent tolerance range and the lowest since at least January 2011, when a new methodology was adopted. Separately, central bank data showed the world No.1 copper producer's May surplus was the highest since May 2011, boosted by a jump in revenue from exports of the red metal. But May's broadly steady imports suggest a slowdown in Chile's ebullient domestic demand, which has buoyed the broadly export-dependent economy as global demand ebbs. Economic growth in the first quarter was 4.1 percent compared with a year earlier, its slowest pace of expansion since late 2011. The bank forecasts Chile's economy will grow between 4.5 to 5.5 percent this year, a slowdown from last year's 5.6 percent expansion. In a central bank survey released on May 22, Chilean traders forecast a quarter-percentage point rate cut to 4.75 percent in 12 months' time. However, they still saw the rate at 5 percent this month, in September and in December. "(Today's data) shows that for the moment inflationary pressures appear to be contained, which, when coupled with the recent slowdown in local activity, indicates a more favorable outlook for a rate cut this year," Banchile Inversiones said in a note to clients. "However, for the moment we maintain our vision for a rate hold at the June 13 monetary-policy meeting." Others in the market called on the bank to exert caution. "The central bank shouldn't fall into the temptation of cutting the rate for now," BBVA said in a note to clients. "Although 12-month inflation is very low, consumption remains dynamic and short-term deflationary shocks... have disappeared. For now we think holding rates in the short-term trumps any preventive measure." Elsewhere in the region, Brazil's annual inflation in May inched higher to hit the ceiling of the government's target range, keeping pressure on the central bank to raise interest rates further and leaving little room for the government to cope with a recent currency drop.