January 6, 2017 / 12:25 PM / a year ago

UPDATE 1-Inflation drop, weak growth pave way for Chile rate cut

(Recasts, adds comments from economists, background details)

SANTIAGO, Jan 6 (Reuters) - Inflation in Chile continued to quickly subside in December, which combined with weak economic growth data should pave the way for the central bank to cut its benchmark interest rate for the first time in over two years on Jan. 19.

The consumer price index fell 0.2 percent in December as prices for food and non-alcoholic beverages as well as recreation and cultural activities decreased, the government’s INE statistics agency said on Friday.

That was below a Reuters forecast for a 0.1 percent increase.

Inflation in the 12 months to December was 2.7 percent, on the lower end of the central bank’s 2 percent to 4 percent target range, while core inflation was 0.0 percent in December, the INE said.

“Combined with the continued string of weak activity data ...December’s bigger-than-expected drop in inflation probably seals the deal for a January rate cut,” said Edward Glossop, Latin America economist for Capital Economics.

Chile’s economic activity rose a lower-than-expected 0.8 percent in November from the same month a year earlier, as mining activity and retail increased, central bank data showed on Thursday.

“Both the minutes and the statement accompanying the central bank’s last policy meeting had already struck a dovish tone and effectively prepared the ground for near-term easing,” added Glossop.

Minutes of the last monetary policy meeting in December revealed one of the bank’s four board members dissented from the majority decision the first time in 15 months. The decision was to keep the benchmark interest rate steady but one member recommended a cut of 25 basis points.

Meanwhile, the bank said in its December quarterly monetary policy report that it saw two interest rate cuts of 25 basis points over the two-year policy horizon. (Reporting by Anthony Esposito; Editing by Mark Potter and Chizu Nomiyama)

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