UPDATE 1-Chile central bank raises rate by 50 bps to 2 pct

Thu Aug 12, 2010 6:33pm EDT

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SANTIAGO, Aug 12 (Reuters) - Chile's central bank raised its benchmark rate CLINTR=ECI by 50 basis points to 2.0 percent on Thursday, as expected, a third consecutive monthly increase as the economy rebounds from a huge earthquake.

The bank is seeking to counter strong demand pressure after the economy expanded more than expected in June and as consumer prices rise on a recovery from the February quake and the global financial crisis.

The bank said domestic demand and activity were more dynamic than seen in the bank's last monetary policy report in June, and that it would continue to withdraw monetary stimulus pending external and domestic macroeconomic conditions.

"Uncertainty has increased over the pace of the recovery of global activity and volatility in financial markets remains high," the bank said in a statement.

"Prices of basic goods continue to be high. Overall, the external context faced by the Chilean economy continues to be favorable," the bank added.

Chile joined Brazil and Peru in a regional monetary tightening cycle in June, after holding its benchmark rate at a record low in the wake of the global financial crisis and then the devastating Feb. 27 quake.

The rate increase is expected to continue to boost the peso, which rose to new 5-month highs on Thursday, prompting President Sebastian Pinera to warn the government would take all necessary measures to keep the currency competitive.

Chile's comparatively higher rates are expected to attract foreign capital and strengthen the peso, at a time when many of the world's leading economies are keeping interest rates at historic lows. For more, see [ID:nN12124343]

Interest rate futures point to a year-end monetary policy rate of 3.75 percent, but analysts are divided about the pace at which the bank will hike. For a snap analysis, see [ID:N12129420]

Chilean consumer prices rose 0.6 percent in July, slightly below market forecasts, while the economy grew more than expected in June though the pace of recovery from the quake is slowing, data showed last week. [ID:nN06212120] [ID:nN05273094] (Reporting by Alonso Soto, Brad Haynes, Molly Rosbach, Antonio de la Jara, Fabian Cambero; Editing by Simon Gardner and Paul Simao)

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