UPDATE 2-Good domestic news a risk to Chile's economy -cbank
* Chile's dynamism has not increased inflation pressure -cbank * Floating exchange rate most appropriate for Chile -cbank * Demand, exports, investment boost roaring economy SANTIAGO, March 6 (Reuters) - Domestic risks to Chile's booming economy have become more important in the short term, but have not translated into higher inflationary pressures, central bank head Rodrigo Vergara said on Wednesday. With unemployment at a six-year low, growth exceeding forecasts and capital pouring into the world's No. 1 copper producer, some analysts have questioned whether the investor darling's economy is at risk of overheating. "Domestic risks have gained importance, at least in the short term," Vergara said in a presentation published on the bank's web site. "One important feature of the current juncture has been that high growth and low unemployment have not translated into higher inflationary pressures." The tone marks a change from 2012, when many experts warned that Chile's small, export-dependent economy could suffer a sharp slowdown on the back of softer demand from top trade partner China and the impact of the euro zone crisis. But economic activity in Chile, which also exports wine, salmon, fruits and wood products, totaled 5.6 percent growth last year, defying forecasts. The economy is seen expanding between 4.25 percent and 5.25 percent this year, according to the central bank. The bank has held the benchmark interest rate at 5 percent since a surprise cut in January 2012, as it weighs slowing global demand against domestic dynamism. Traders polled by the bank see the rate inching up to 5.25 percent in 12 months, due to moderate inflation and brisk growth. "It is important to note that in these days this level for the policy rate is quite high by international standards," Vergara said. Latin America has fretted over stimulus measures in the developed world, which have caused an uptick in capital flows to the region from investors seeking better returns and have strenghtened many local currencies. Chile's peso, for instance, gained 8.48 percent last year, one of the strongest performance by an emerging market currency, and has strengthened 1.25 percent so far this year. The peso's strong performance has triggered calls for a central bank intervention from exporters. A floating exchange rate is "the most appropriate" for Chile, Vergara said on Wednesday. "Nonetheless, there are circumstances that may lead to Central Bank intervention in the foreign exchange market, either to sustain an adequate level of foreign reserve assets, or to respond to over-reactions in the exchange rate that are not aligned with medium-and long-term fundamentals," he added. Chile's peso traded broadly flat following Vergara's statement, closing at 472.80 pesos per U.S. dollar. Vergara has often said intervening in the currency market was a tool at the bank's disposal, but that if it hadn't intervened so far it was because it hadn't been deemed necessary. The bank deployed a dollar-purchasing program in 2011 to curb peso strength after it appreciated to its highest level in more than 2-1/2 years at 465.50 per dollar.
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