(Adds central bank comments on interest rate, current account)
By Antonio De la Jara and Anthony Esposito
SANTIAGO, June 16 (Reuters) - Chile’s central bank on Monday cut its 2014 growth forecast and raised its inflation view, as widely expected, following months of economic sluggishness with inflation recently jumping above a five-year high.
In its quarterly Monetary Policy Report (IPoM), the bank reduced its forecast for gross domestic product growth this year to a range of 2.5 percent to 3.5 percent, from prior guidance for 3.0 percent to 4.0 percent, in line with a Reuters poll.
“In recent months, activity and demand have continued to decelerate ... along with investment, which has been dragging for some months, there is now also weaker private consumption,” the central bank said.
However, the bank sees the economy slowing picking up in the latter half of the year as investment begins to recover.
The bank also increased its 2014 inflation forecast to 4.0 percent from 3.0 percent.
Inflation reached an annual level of 4.7 percent in May, well above its 2 percent to 4 percent target, but the bank reiterated the rise will likely be temporary due in part to a slowing economy.
A sharp depreciation of Chile’s peso currency versus the U.S. dollar has made imports more expensive, fueling inflation.
“In its base case scenario, the board estimates that inflation will remain above 4 percent for a few more months, ending 2014 around that level,” the bank said. “It will keep falling in 2015, reaching levels of around 3 percent in the first half of next year.”
The central bank reiterated recent comments that it would consider future rate cuts depending on the evolution of domestic and external macroeconomic conditions and implications on the inflation outlook.
But the bank’s president Rodrigo Vergara added a touch of hesitation to the idea of more monetary easing.
“In a context where monetary policy is already expansive and prices have risen more than forecast, it is necessary for the central bank to adequately consider the risks surrounding its decisions,” he said.
The bank’s five-member board cut the rate by 100 basis points to 4.0 percent between October and March to help boost ebbing economic growth but has since left the rate unchanged as inflationary pressures built up.
One benefit of cooling growth has been a decrease in the country’s current account deficit, as demand growth falls and exports pick up.
The bank also on Monday reduced its 2014 forecast for Chile’s current account deficit to 2.5 percent of expected GDP, from a prior view of 3.6 percent.
Earlier this year, some economists had flagged concerns that Chile shared some of the characteristics of the so-called Fragile Five emerging market economies - Brazil, India, Indonesia, South Africa and Turkey - such as a large current account deficit. (Editing by Chizu Nomiyama, Jeffrey Benkoe and Andrew Hay)