Chile central bank cuts interest rate but calls for caution

By Fabian Cambero and Brendan O'Boyle

SANTIAGO (Reuters) - Chile's central bank cut its benchmark interest rate by 25 basis points to 5.00% on Tuesday, extending an easing cycle that began last year while also warning of inflation risks in the short term.

The unanimous decision was in line with forecasts from analysts and traders and comes amid cooling inflation, and as the world's top copper producer faces challenges to rev up growth.

Annual inflation in Chile eased to 4.2% in November, down from the 4.7% reported in October. That is still above the central bank's target range of 2% to 4%.

November's inflation reading came in above the projections in the main scenario of the bank's third-quarter monetary policy report.

The short-term inflation outlook has become more challenging due to higher cost pressures, the bank said in a statement announcing the decision, adding that it sees inflation fluctuating around 5.0% in the first half of 2025.

"The balance of risks for inflation is biased to the upside in the short term, which highlights the need for caution," the central bank said.

The bank said its board would gather information to evaluate the opportunity to reduce the benchmark rate in the coming quarters.

Chile began cutting borrowing costs in July 2023 after holding its key rate steady at 11.25%, and has since brought the rate down by 625 basis points in line with falling inflation.

Tuesday's statement suggests a pause in the rate-cutting cycle in January, JPMorgan said in an analyst note after the announcement, underscoring its "base case scenario for the next 25 basis point policy rate cut to occur in March."

While the bank called for caution in the short term, it sees weaker domestic demand mitigating inflationary pressures in the medium term, which would contribute to a downward trajectory for the rate over the policy horizon.

(Reporting by Fabian Cambero and Brendan O'Boyle; Editing by Alexander Villegas and Bill Berkrot)