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UPDATE 2-Good domestic news a risk to Chile's economy -cbank
March 6, 2013 / 3:26 PM / 5 years ago

UPDATE 2-Good domestic news a risk to Chile's economy -cbank

* Chile's dynamism has not increased inflation pressure
    * 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
    "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
    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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