Chile well-placed for rebound: central bank

BASEL, Switzerland (Reuters) - Chile's economy is well-placed to make a strong recovery from the impact of a devastating earthquake last weekend, the head of the country's central bank said on Sunday.

Central bank governor Jose De Gregorio said the economy could still grow by between 4.5 to 5.5 percent this year despite an initial hit from the earthquake and tsunami, which killed hundreds and ravaged cities and villages along the South American country's south-central coastline.

"Our recovery will be ... comparatively speaking, relatively strong because we do not have too many constraints for the economy to return to growth again," De Gregorio said in an interview with Reuters.

Speaking on the sidelines of a Bank for International Settlements meeting in Basel, he said central bank support would help the process although cutting benchmark interest rates below the current record-low 0.5 percent was not under consideration.

The central bank has already said it will keep policy loose and De Gregorio stressed policymakers had yet to make a full assessment of the impact of the earthquake and decide on their response.

"We have a very expansionary monetary policy and that should help the recovery," he said.

"We have to distinguish between what is a constant very low interest rate and expansionary monetary policy, which is low interest rates but not necessarily 0.5 percent: that's what the board of the bank has to decide, what will be the stance of monetary policy in coming months."

Expansionary policy he defined as rates of "below 4-5 percent in the current circumstances, 6 percent in normal times." Inflation rates could also rise given a scarcity of some goods, but this would be temporary.

The world's top copper producer, Chile boasts a reputation as one of Latin America's most stable economies and analysts have said they still see solid growth this year, with a pick-up in the second half of the year.

Data on Friday showed Chile's economic activity index, the IMACEC, rose more than expected in January and De Gregorio said February's result would be "OK," before a collapse in March.

"Effectively last week, the country stopped because of the earthquake. So we will have a couple of months with a very bad release but then the economy should start picking up again," he said.

Asked if growth could be within the central bank's previous 4.5 to 5.5 percent range, he said: "I cannot rule (this) out, still we don't have a full assessment ... there are a lot of uncertainties because these are rare events, but I cannot rule out that all in all we could still talk about that range."

FOREIGN FLOWS EXAGGERATED

De Gregorio said the sectors most affected by the devastation were agriculture, forestry and fishing, and a rise in the currency could hamper recovery in the export sector.

The peso has firmed over the last week as investors bet dollars will flow into the country with the rebuilding work, estimated to cost up to $30 billion.

But De Gregorio said these bets might be exaggerated.

"That may be an over-reaction, still you have to see how you finance it but for the real exchange rate, flows have a very limited effect," he said.

Although the central bank could intervene to cap the currency's rise, current levels were not out of line with economic fundamentals.

"We do not rule out intervention, but we consider it exceptional," he said. "The exchange rate has been moving within limits, within ranges, that are consistent with the long-term fundamentals."

How to finance reconstruction efforts was one of the challenges facing the incoming government, due to take office on March 11, he said. Extending domestic borrowing would put upward pressure on interest rates but selling dollars -- for example from copper boom savings -- would push up the exchange rate.

"Chile has full access to financial markets, to multilateral agencies, so there shouldn't be problems of financing. The problem that the new government will have to solve is ... what are the first priorities. You cannot do it all right away," he said.

(Reporting by Krista Hughes; Editing by Diane Craft)