UPDATE 1-Chile central bank cuts rates, hints more reductions possible

Thu Mar 13, 2014 5:59pm EDT

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SANTIAGO, March 13 (Reuters) - Chile's central bank cut its key interest rate on Thursday to boost economic growth, and suggested more reductions could be in the pipeline if domestic and external macroeconomic conditions merit it.

The 25 basis points cut to 4.0 percent was widely forecast by market watchers, who had also expected the bank to implement a neutral bias going forward.

Though the bank did not eliminate the expansionary bias present in its two previous monetary policy statements, it toned it down.

"The board will consider the possibility of making additional cuts to the policy rate in line with the evolution of domestic and external macroeconomic conditions and its implications on the inflationary outlook," the bank said.

At its meetings in January and February the bank had said it might be necessary to increase the monetary stimulus in coming months.

"Unlike at its last meeting, this time the bank decided to moderate its bias," said Ruben Catalan, analyst with Bci Estudios in Santiago.

With the latest cut, the bank has now lowered the rate by 100 basis points since October.

Weakness in the mining, manufacturing and the previously robust retail sectors have weighed on growth.

Monthly consumer prices, however, posted a larger-than-expected rise in February, taking the annual rate to 3.2 percent, mainly due to the effects of a depreciating currency. That had led a minority in the market to predict that the bank might choose to play it safe on Thursday.

But with the economy showing its weakest growth in January since an earthquake devastated Chile in early 2010, market participants had mostly bet the bank would cut.

"The Chilean economy has continued to lose strength. Domestic output and demand have grown less than assumed in the (quarterly) Monetary Policy Report, particularly in investment-related sectors," the bank said.

The rate cut followed similar moves in Mexico and Peru late last year to spur economic growth. Both regional peers have since kept rates on hold. Brazil, by contrast, has hiked rates to head off inflation in a tightening cycle that may be near its end.

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