Chile's central bank cut its policy rate by 25 basis points to 4.75 percent, citing slower global growth, indications that the domestic demand will slow down further and inflation below forecasts.
The rate cut comes after the Central Bank of Chile's board considered cutting the rate in the last five meetings but ultimately decided to maintain the rate while awaiting evidence of how the economy was evolving. But the bank had warned in recent months that it may cut its rate if the economy continues to slow down.
The rate cut came as a surprise to most economists who had expected to central bank to maintain its rate this month but then cut later this year.
The central bank, which previously cut its rate by 25 basis points in January 2012, did not give any sign of future policy direction, saying "any future changes in the monetary policy rate will depend on the implications of domestic and external macroeconomic conditions on the inflationary outlook."
Chile's inflation eased to 2.0 percent in September from 2.2 percent in August, at the bottom of the bank's 2-4 percent inflation range, and the central bank said it would continue to conduct monetary policy with flexibility so projected inflation stands at 3.0 percent over the policy horizon.
Chile, the world's largest copper exporter, has been feeling the impact of slower global growth for months and the central bank said a weaker medium-term scenario had consolidated, characterized by slower world growth, lower terms of trade for Chile, less favorable financial conditions and the maturing of the global cycle of mining investments.
Although the U.S. Federal Reserve's decision to postpone a tapering of asset purchases had led to lower long-term interest rates, the bank said the fiscal agreement reached in the United States was "temporary, so further financial tensions cannot be ruled out."
Chile's Gross Domestic Product grew by 0.5 percent in the second quarter from the first for annual growth of 4.1 percent, down from 4.5 percent.
The bank said economic activity was in line with its forecast and the growth in final demand had slowed, though not as sharply as forecast.
"Various indicators anticipate that it will decelerate further," the bank said.
While Chile's exports have been weakening in recent months, domestic demand had remained resilient. In June the central bank cut is 2013 growth forecast to 4-5 percent, down from 2012's 5.6 percent, and its inflation forecast to 2.6 percent.