UPDATE 2-Chile cenbank dampens recovery hype, holds rate

SANTIAGO, Nov 12 (Reuters) - Chile's central bank held its benchmark interest rate steady at 0.50 percent on Thursday and said it would relax complementary stimulus measures, but hinted at a more gradual recovery in the economy of the world's top copper producer. The central bank said the monetary policy board expected the benchmark rate to remain at 0.5 percent for a prolonged period, "which will extend at least until the second quarter of next year." In its previous statement in October, it had simply referred to a prolonged period. "The bank is consistent with the view that they would start hiking rates in the second quarter of 2010 and confirms views that they see the tightening cycle as a gradual one instead of the more aggressive path that the market anticipated," said Alberto Ramos, senior economist at Goldman Sachs in New York. The bank said it would gradually reduce the term of a liquidity facility for banks unveiled in July in a bid to help fend off the global crisis, and end the facility in May 2010. "The board estimates the normalization of the bank's benchmark rate in the second half of next year would be more gradual than the pace implicit in asset prices," the bank said in a statement. The central bank has slashed its key rate by 775 basis points since the beginning of the year, leading the charge to cut rates in Latin America. INTERVENTION LOOMING? Central Bank President Jose De Gregorio sent a verbal warning to markets late on Tuesday, saying Chile's free-float system "leaves us room to intervene in extreme circumstances." Finance Minister Andres Velasco followed his lead on Thursday, saying he was keeping a close eye on the peso, which has surged around 26 percent against the dollar year-to-date. However, the bank's monetary policy statement made no reference to any possible intervention to halt the sharp appreciation of the peso. The central bank said on Wednesday the economy likely expanded 5.3 percent in the third quarter compared with the second quarter, signaling the start of economic recovery from the global crisis. However, in a report prepared by the bank's research department and given to the monetary policy board to evaluate before Thursday's rate-setting meeting, the central bank also said the economy likely contracted 1.3 percent in the third quarter compared with the same quarter last year due to lower industrial activity. Chile's economic activity index, the IMACEC, fell by a steeper-than-expected 1.1 percent in September from the same month a year ago, hit by a drop in industrial output that cast a cloud over economic recovery hopes. The Chilean economy is expected to contract 1.5 percent to 2 percent this year, according to the central bank. Growth for 2010 is forecast at between 4.5 percent and 5.5 percent. Analysts say Chile will likely be the first country in the region to increase rates as the economy of the world's top copper producer recovers from the worst of the crisis, but expect the bank to hold rates steady for a few more months. Chile saved billions of dollars in copper boom savings in sovereign wealth funds revenues, which has helped it weather the crisis better than many South American countries. (Reporting by Rodrigo Martinez, Alonso Soto, Simon Gardner; editing by Leslie Adler) Keywords: CHILE RATES/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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