* Rate has been held at 5 pct since Jan 2012 cut * Slower local growth, demand could lead to future cuts * Central bank has said key rate neutral for Chile By Alexandra Ulmer SANTIAGO, May 16 (Reuters) - Chile's central bank is expected to hold its key interest rate steady later on Thursday, but could strike a more dovish tone after data showed the Andean country's buoyant economy slowing more quickly than forecast. The rate has been held at 5.0 percent since a surprise cut in January 2012. Robust local economic growth, low inflation and ebullient domestic demand have countered external economic threats and kept the bank's hands tied. That balance may have shifted slightly, analysts say. Prices of top export copper have tumbled recently, arch economic growth came in at its weakest in nearly two years and consumer prices dropped sharply in April. Both analysts and traders polled by the bank now see the rate at 5 percent through a two-year horizon, a reversal from previous bets on an increase in the medium-term. Bank president Rodrigo Vergara has reiterated that while the rate is high by international standards, it is neutral for Chile. In monetary policy parlance, a neutral rate does not spur or slow growth, all other factors being equal. "While we expect the bias to remain neutral, which will anticipate a rate hold in the short-term, we think (the bank's post-meeting communique) will leave the door open to a potential rate cut if the local slowdown deepens or expectations are unmoored," Banchile Inversiones said in a note to clients. The bank forecasts 4.5 percent to 5.5 percent economic growth for world No.1 copper producer Chile in 2013, easing from the 5.6 percent growth rate last year. Last week Vergara said Chile's economic growth is slowing faster than expected, citing signs of softer domestic demand. This marks a turnabout from earlier in the year, when Chile's economic growth was still thriving and domestic demand was flagged as the most significant local risk to the economy. Firm local demand had fueled fears of overheating, but those concerns seem to have been left behind amid signs of a slowdown, leading some analysts to point to the possibility of a rate cut as early as this year. "Further weakness in the incoming data on activity may open a window of opportunity for the central bank to cut the policy rate in order to better align domestic and global monetary conditions, reducing appreciation pressures on the (peso currency)," Goldman Sachs said in a note to clients. "Hence, while we do not pencil in rate cuts in 2013 in our baseline scenario, we see a distinct probability this may occur during (the second half of 2013)," Goldman Sachs added. The apparent economic easing has relieved pressure on Chile's peso, whose strength is a major headache for exporters in commodities-dependent Chile. The currency has retreated from the year-and-a-half high it reached in April, when it was buoyed by Chile's robust economy, an attractive rate differential and copper prices. So-called quantitative easing measures in developed economies have also helped fuel the peso's appreciation. The peso was trading around 479 per U.S. dollar on Thursday, far weaker than last month, when it breached 465.50 per dollar. LATIN AMERICA Elsewhere in the region's expanding economies, banks are using an array of monetary policy strategies. Regional powerhouse Brazil's central bank last month raised rates from a record low to tame inflation. But in Latin America's No.2 economy, Mexico, the central bank is not leaning toward another rate cut, governor Agustin Carstens said earlier this month, adding the market had read too much into some of his recent comments. Neighbor Peru's central bank held its key rate steady at 4.25 percent for the 24th straight month last week, as inflation runs within the target range and the economy expands near its potential. Colombia's central bank last month held its rate steady, pausing a five-month easing cycle on hopes lower borrowing costs and a government stimulus package will spur faster growth. The Chilean central bank is scheduled to announce its rate decision at 6pm local time (10pm GMT).