September 6, 2017 / 2:50 PM / 10 months ago

UPDATE 2-Chile central bank cuts inflation forecast; signals possible easing

(Adds revision of year-end inflation forecast, background)

By Antonio De la Jara

SANTIAGO, Sept 6 (Reuters) - Chile’s central bank said in its quarterly IPoM report on Wednesday it is maintaining its current bias for now, but will need to adopt a more expansive monetary policy should downside risks to inflation materialize.

Inflation has been surprisingly subdued in the world’s top copper exporter in recent months, as has growth, raising speculation of near-term interest rate cuts.

In the IPoM report, the bank significantly revised downward its 2017 year-end inflation forecast to 2.4 percent from its previous forecast in June of 2.9 percent, meaning projected inflation is now toward the bottom of the bank’s 2 percent to 4 percent target range.

“In the short term, inflation risks are biased toward the downside,” the bank said in the report. “The materialization (of this risk) could affect convergence to the (inflation) target, in which case a deepening of the expansiveness of monetary policy will be required.”

In the report, the bank tweaked other key forecasts only slightly. The bank narrowed its 2017 growth projection to 1.25 to 1.75 percent, from a previous range of 1 to 1.75 percent, and raised its forecast for domestic demand growth to 2.6 percent from 2.5 percent. The 2018 forecasts for both figures remained unchanged.

It also revised upward its 2018 year-end inflation forecast to 3 percent from 2.8 percent, indicating that, despite downside risks, it still sees inflation converging on its target in the long term.

Inflation in Chile in the 12 months to July came in at a modest 1.7 percent. At the banks’ last two monetary policy meetings, board members split on whether to maintain the interest rate or cut it in a context of low inflation and growth.

While the bank eventually held the rate in both instances at 2.5 percent, speculation of a possible near-term cut has mounted among analysts.

In the IPoM report, the bank also said it would reduce the number of times per year it meets from 12 to eight and make various adjustments to the content of its official publications. (Reporting by Antonio de la Jara; Writing by Gram Slattery; Editing by Marguerita Choy and Jonathan Oatis)

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