Market split on whether Chile's central bank to hold or cut rate

Tue Nov 19, 2013 12:49pm EST

Related Topics

* Bank surprised market with 25 basis point rate cut in October

* Some think will be start of easing cycle as economy cools

* Monetary policy meeting decision at 6 p.m. local time (2100 GMT) Tuesday

By Anthony Esposito

SANTIAGO, Nov 19 (Reuters) - Chilean market watchers are more or less split on whether the country's central bank will hold its key interest rate steady on Tuesday or follow up last month's surprise reduction with a another cut.

The central bank itself underscored that late on Monday, saying for "this meeting, the majority (of the market) is expecting a rate hold, but a relevant percentage expect a rate cut of 25 basis points."

In a move to spur growth, the bank on Oct. 17 unexpectedly cut the rate by a quarter of a percentage point to 4.75 percent, citing slower world growth, less favorable terms of trade for the Andean country, and expectations for cooling domestic demand.

Since then, domestic demand, an important driver of the economy, has continued to slow. Annual inflation has also fallen well below the central bank's 2 to 4 percent target range, giving weight to arguments for another rate reduction.

"The central bank has few, if any, reasons to stay on hold in November and follow a piecemeal policy path," said Tiago Severo, economist at Goldman Sachs.

"Leading indicators of activity suggest the economy should lose momentum in the fourth quarter as private consumption softens."

Earlier this month, the bank left the door open to future interest rate cuts, saying the timing of any future monetary policy moves will depend on how economic conditions evolve at home and abroad.

A stronger-than-expected 4.7 percent economic growth spurt in the third quarter and a widening current account deficit to the tune of $3.44 billion - equivalent to 5.1 percent of gross domestic product - have led some analysts to call for a rate hold on Thursday.

"It's hard to justify more monetary stimulus when the economy is growing near its trend rate and there is nearly full employment, and on top of that (we have) a considerably high current account deficit," Universidad de Chile economist Tomas Izquierdo said.

Some commentators have also suggested the bank may prefer not to change rates in an election month. Chile held a presidential election on Sunday which will go to a second round in December.

A central bank poll published last week showed that 30 out of 56 traders expected the benchmark rate to be cut by 25 basis points to 4.50 percent, while another showed 39 out of 58 analysts surveyed forecast it would be held at its current level.

The bank will publish its rate decision on its website at 6 p.m. local time (2100 GMT).

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