UPDATE 2-Chile expected to further ease monetary policy in 2013

Fri Oct 18, 2013 5:17pm EDT

* Cbank surprisingly cut rate to 4.75 pct on Thursday

* Lower investment, demand to prompt gradual easing cycle

By Anthony Esposito

SANTIAGO, Oct 18 (Reuters) - Chile's central bank is primed to build off the momentum of a surprise interest rate cut on Thursday to prop up its cooling economy by slowly loosening monetary policy in what remains of 2013.

In a move to spur growth, the bank cut its benchmark rate by 25 basis points to 4.75 percent, citing slower world growth, less favorable terms of trade for the Andean country, and expectations for cooling domestic demand.

Another cut of the same size, bringing the rate to 4.5 percent, is likely by the end of the year, economists and analysts polled by Reuters said on Friday.

"I think the (central bank) has started a cycle, I don't think this is a one-off thing. So I do expect another 25-basis- point cut at the next meeting or certainly by year-end, to bring it to a total of 50 basis points in cuts in 2013," said Kathryn Rooney Vera, Latin America strategist at Bulltick Capital Partners in Miami.

Although the timing of Thursday's cut caught the market off guard, some suggested it was intended to avoid coinciding with November's presidential election, or having to otherwise wait until December.

Former center-left president Michelle Bachelet is poised to be elected again to Chile's top office next month, but eight other candidates jostling in the first round may push the vote to a December runoff, a poll showed on Thursday.

Given the bank has "never changed the (rate) in an election month since it became an independent entity in 1989, and the potentially negative consequences of the US Federal Government shutdown on global economic growth, the board could consider the risk of waiting until December to ease conditions too high," Sebastian Brown of Barclays said in a note to clients.

The rate reduction, which Finance Minster Felipe Larrain said would help to maintain a competitive exchange rate, boost the export sector and offset the effects of lower domestic demand, effectively weighed on the peso currency and bond yields on Friday.

Chile's peso lost 0.56 percent versus the U.S. dollar to end at 496.70 per U.S. dollar.

Yields on five-year inflation-indexed bonds slipped to 2.21 percent from 2.26 percent in the prior session, and yields on 10-year inflation-indexed bonds fell to 2.23 percent from 2.26 percent.

With investment and demand easing at home, and global prices for Chile's top export copper retreating, many in the market are pricing in a gradual monetary easing cycle over the next year.

By the end of 2014, the bank is expected to have reduced the rate to 4.25 percent, according to the median estimate of 16 economists and analysts surveyed.

The benchmark rate will likely range between 3.75 percent to 4.5 percent in December 2014, those surveyed said, underscoring a divided market.

Future rate moves will be "data dependent" and the minutes of Thursday's monetary policy meeting should give a clearer picture of why the bank finally cut the key rate after keeping it at 5.0 percent since January 2012, said George Lei, economist at Nomura.

Chile's potentially downward-trending rate contrasts with much of the developed world, where rates are far lower and one key question is when they will start creeping up again.