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UPDATE 1-Chile cenbank holds key rate, hints at future cuts
January 16, 2014 / 9:51 PM / in 4 years

UPDATE 1-Chile cenbank holds key rate, hints at future cuts

* Rate held steady at 4.5 pct for second straight month

* Bank board suggests stimulus likely to increase in coming months

* Bank cut rate by 25 basis points in Oct and Nov

By Anthony Esposito

SANTIAGO, Jan 16 (Reuters) - Chile’s central bank kept steady its key interest rate on Thursday, but suggested it could increase monetary stimulus in coming months in a bid to lift easing economic growth and channel inflation toward its target of 3 percent.

A recent pickup in inflation, continued weak economic output and cooling domestic demand, especially investment, have led many in the market to bet on new rate cuts following 25-basis-point reductions in October and November. .

The bank held the rate steady at 4.50 percent at the previous meeting on Dec. 12.

“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,” the central bank said in its post-meeting statement on Thursday.

Recent data has shown that growth in the top copper producer remained sluggish in November, while inflation picked up pace in December.

A 0.6 percent jump in December consumer prices brought inflation in the 12 months to December to 3.0 percent, the midpoint of the central bank’s target range.

The bank pointed out that food and energy, as well as the short-term impact of the Chilean peso’s depreciation, have impacted inflation.

Chile’s peso depreciated 9 percent versus the U.S. dollar last year, and has lost 1.26 percent more in the first weeks of 2014, making the price of imports more expensive.

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

Expectations are high that the rate will be cut two more times in 2014, as economic growth continues to decelerate and domestic demand ebbs.

“The (central bank) has good timing, and they’re letting the market know they’re going to cut the rate. Their timing is good in terms of reacting to the economic outlook ahead,” said Matias Madrid, chief economist with Banco Penta.

He foresees 25-basis-point cuts in February and March.

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