UPDATE 2-IMF cuts Chile 2013 growth forecast to 4.6 pct

Mon Jul 8, 2013 12:25pm EDT

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SANTIAGO, July 8 (Reuters) - Growth in Chile's export-dependent economy will slow to 4.6 percent this year due to softer copper prices, investment and domestic demand, the International Monetary Fund said in a report posted on the central bank's website on Monday.

In April, the IMF projected the economy of the world's No. 1 copper producer would expand by 4.9 percent in 2013.

"The key near-term challenge is to support a soft landing in the economy in the context of a widening current account deficit, swelling capital inflows, and an uncertain outlook for copper," the IMF said in the report.

The economy grew 5.6 percent last year, but growth eased in the first quarter of 2013 to 4.1 percent, compared with a year earlier, its slowest pace of expansion since late 2011.

Chile's central bank anticipates the economy will expand between 4 percent and 5 percent this year, a half percentage point below its prior projection, according to the bank's quarterly Monetary Policy Report released last week.

Prices for copper, a metal used in the power and construction industries, have fallen about 15 percent so far this year.

The IMF warned that a steep and lasting price decline would have a major impact on Chile's current account and foreign direct investment and public finances as well as medium-term growth prospects. About 14 percent of government revenue came straight from copper sales in 2012.

Analysts have long warned that commodities-dependent Latin American countries should diversify their economies. Copper accounts for roughly 60 percent of Chile's export revenue.

In the medium to long term, the country's biggest challenge "is to foster sustained growth without the boost from rising copper prices and against the headwind of a stagnating working-age population," the report added.

'FINELY BALANCED'

"Monetary policy considerations are finely balanced" in Chile, where rates have been on hold at 5 percent since a surprise cut in January 2012, the IMF added in its report.

"Staff and the central bank agreed that a broadly neutral stance is appropriate and that this might call for a rate cut if inflation and inflation expectations remain low, domestic demand weakens faster than expected, or the external outlook deteriorates," the IMF said.

The bank's latest traders poll, released on June 26, showed the median forecast was for the rate to remain at 5 percent in July and be cut to 4.75 percent in three months.

Analysts polled on June 11, however, had priced in a cut to 4.75 percent at next week's meeting.

In standard monetary policy parlance, a neutral rate neither spurs nor curbs economic growth.

"At the same time, staff noted that if domestic demand does not cool as envisaged, a policy rate increase might be needed, despite the likely effect on peso appreciation," the IMF added.

While a faster-than-expected slowdown in Chile has prompted market bets on a looming interest rate cut, domestic consumption has remained strong.

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