UPDATE 1-Chile central bank cuts rates, hints at more to come

Tue Feb 18, 2014 4:34pm EST

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SANTIAGO Feb 18 (Reuters) - Chile's central bank on Tuesday cut its benchmark interest rate by 25 basis points and maintained its bias towards more easing as the top copper exporter's economy runs out of steam.

The reduction in the rate to 4.25 percent had been widely expected after the bank entered an easing cycle in October.

However, many in the market had predicted that the bank would moderate its bias following recent turmoil in emerging markets, which has led other central banks to raise rates to defend their weakening currencies.

In fact, the Chilean central bank gave exactly the same bias towards more easing as it did last month.

"The board estimates that in the coming months it might be necessary to increase the monetary stimulus to ensure that projected inflation will stand at 3 percent in the policy horizon," it said in its post-meeting statement on Tuesday.

It cited lower-than-expected growth in domestic output and demand, particularly in investment.

The bank also underscored that the Chilean peso has depreciated and the pace of nominal wage growth has moderated in recent months.

Chile's inflation stayed within the bank's target range in January, despite the currency depreciation that made imports more expensive. Compared to other emerging economies, that has given the bank more room to try to stimulate the economy by cutting rates.

"The most important part of the statement is that it repeats the sentence that the most likely scenario is that they keep cutting rates," said Sergio Tricio, head of research with ForexChile.

"We think they could cut by 25 basis points again in March."

The bank had made 25-basis-point reductions in October and November to take the rate from 5.0 percent to 4.50 percent, before pausing in December and January.

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