* Cbank surprisingly cut rate to 4.75 pct on Thursday
* Lower investment, demand to prompt gradual easing cycle
By Anthony Esposito
SANTIAGO, Oct 18 Chile's central bank is primed
to build off the momentum of a surprise interest rate cut on
Thursday to prop up its cooling economy by slowly loosening
monetary policy in what remains of 2013.
In a move to spur growth, the bank cut its benchmark rate
by 25 basis points to 4.75 percent, citing slower
world growth, less favorable terms of trade for the Andean
country, and expectations for cooling domestic demand.
Another cut of the same size, bringing the rate to 4.5
percent, is likely by the end of the year, economists and
analysts polled by Reuters said on Friday.
"I think the (central bank) has started a cycle, I don't
think this is a one-off thing. So I do expect another 25-basis-
point cut at the next meeting or certainly by year-end, to bring
it to a total of 50 basis points in cuts in 2013," said Kathryn
Rooney Vera, Latin America strategist at Bulltick Capital
Partners in Miami.
Although the timing of Thursday's cut caught the market off
guard, some suggested it was intended to avoid coinciding with
November's presidential election, or having to otherwise wait
Former center-left president Michelle Bachelet is poised to
be elected again to Chile's top office next month, but eight
other candidates jostling in the first round may push the vote
to a December runoff, a poll showed on Thursday.
Given the bank has "never changed the (rate) in an election
month since it became an independent entity in 1989, and the
potentially negative consequences of the US Federal Government
shutdown on global economic growth, the board could consider the
risk of waiting until December to ease conditions too high,"
Sebastian Brown of Barclays said in a note to clients.
The rate reduction, which Finance Minster Felipe Larrain
said would help to maintain a competitive exchange rate, boost
the export sector and offset the effects of lower domestic
demand, effectively weighed on the peso currency and bond yields
Chile's peso lost 0.56 percent versus the U.S.
dollar to end at 496.70 per U.S. dollar.
Yields on five-year inflation-indexed bonds
slipped to 2.21 percent from 2.26 percent in the prior session,
and yields on 10-year inflation-indexed bonds fell
to 2.23 percent from 2.26 percent.
With investment and demand easing at home, and global prices
for Chile's top export copper retreating, many in the market are
pricing in a gradual monetary easing cycle over the next year.
By the end of 2014, the bank is expected to have reduced the
rate to 4.25 percent, according to the median estimate of 16
economists and analysts surveyed.
The benchmark rate will likely range between 3.75 percent to
4.5 percent in December 2014, those surveyed said, underscoring
a divided market.
Future rate moves will be "data dependent" and the minutes
of Thursday's monetary policy meeting should give a clearer
picture of why the bank finally cut the key rate after keeping
it at 5.0 percent since January 2012, said George Lei, economist
Chile's potentially downward-trending rate contrasts with
much of the developed world, where rates are far lower and one
key question is when they will start creeping up again.