UPDATE 1-Chile bank board split over June rate decision, points to future cut

Fri Jun 27, 2014 10:27am EDT

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SANTIAGO, June 27 (Reuters) - Chile's central bank board was divided about its decision to keep the key interest rate on hold at 4.0 percent at its June monetary policy meeting, with one of the five members voting for a cut, minutes of that meeting showed on Friday.

It was the first monetary policy decision that was not unanimous since February 2009, something that analysts said underscores the bank's difficult juggling act to stimulate the economy without fanning inflation.

Board member Pablo Garcia voted to lower the rate by 25 basis points to 3.75 percent, while the other four members voted for the hold.

The bank cut the key rate by 100 basis points between October and March in a bid to boost Chile's slowing economy, but rising inflation has since stayed its hand at the last three monetary policy meetings.

"They want to cut but they just don't feel comfortable," said Pedro Tuesta, an economist with 4Cast consultancy in Washington D.C, adding that the bank was concerned that inflation could surprise on the upside again.

Consumer prices rose to 4.7 percent in May on an annualized basis, a more than a five-year high and well above the central bank's target range of 2 percent to 4 percent.

"But if we have some downward surprises in inflation they will rush to cut," said Tuesta, who believes the next rate reduction could come in August or September.

The bank is likely laying the groundwork for a future rate cut, highlighting in the meeting's minutes that economic deceleration is now impacting private consumption, one of the main motors behind Chile's economy, and that there are signs of slack in the labor market.

"All the board members agreed that the economy was clearly slowing down, which would imply a lower-than-expected GDP growth, and (was) now spreading to private consumption and related sectors," minutes of the meeting said.

"Regarding the labor market, all the board members agreed that there were signs that it was losing strength, despite the higher rate of annual increase in nominal wages," the minutes added.

Bank chief Rodrigo Vergara said last Friday that the bank's expansive monetary policy bias would continue and further rate cuts were probable.

For a link to the minutes, please see here (Reporting and Writing by Anthony Esposito; Editing by Chizu Nomiyama)

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