UPDATE 2-Chile cenbank holds key rate steady, sees economy slowing
SANTIAGO Dec 12 (Reuters) - Chile's central bank held its key interest rate steady at 4.50 percent, taking a much-anticipated break after two consecutive cuts, even as it pointed out that the economy is gradually losing strength.
A mixed bag of economic data in the world's top copper producer has made setting and forecasting monetary policy tricky.
The Andean country's crucial export sector has been hit by lower global demand dragging on overall economic growth. However, domestic demand has remained buoyant, though it is also cooling moderately, the labor market is tight, and inflationary pressures remain mild.
Within domestic demand, investment has slowed far more sharply than consumption, which is still expanding at a quick pace.
"Output is growing slightly below trend, and a slowdown is observed in domestic expenditure," the bank said in its post-meeting statement.
The bank had previously said the rate is now at a neutral level after 25-basis-point reductions in October and November, and that it does not foresee any "significant" rate changes.
Both analysts and traders polled by the bank prior to Thursday's meeting had expected the rate to be kept steady, though a slight majority of analysts expect a reduction in January and most traders see a cut within three months.
The bank noted in its statement that expectations for tapering of the Federal Reserve's asset purchase program to begin in coming months, pushing U.S. long-term interest rates higher, and helping the dollar appreciate in world markets.
Chile's peso currency has depreciated around 10 percent against the greenback so far this year.
"Increased inflation and the currency's depreciation gave the central bank room to pause its cutting-cycle," said Ruben Catalan, economist with BCI Estudios.
If tapering triggers capital outflows from emerging economies there is a risk of faster-than-expected currency depreciations, said Catalan.
"That should prompt Chile's central bank to consider further cuts so as not to fall behind the curve," he said, which could make lowering the rate more difficult.
Regarding inflation, which was measured at 2.4 percent in the 12 months to November following a 0.4 percent rise in consumer prices that month, the central bank said recent indicators as well as private expectations "are consistent with inflation converging to the target within the monetary policy horizon."
The bank's target inflation range is 2 percent to 4 percent.
The Andean economy is forecast to post 4.2 percent growth this year, slower than last year's 5.6 percent pace, but still well above global and regional averages.
Elsewhere in the region, several central banks appear to be moving towards softer monetary policy action, or holding fire altogether.
Regional powerhouse Brazil's central bank has signaled it could slow one of the world's most aggressive monetary tightening cycles, while Mexico's central bank held interest rates at a record low earlier this month.
In neighboring Peru - like Chile, a commodities-dependent economy with strong domestic demand - the bank is expected to leave its key rate unchanged on Thursday following last month's surprise cut to 4 percent.
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