March 22, 2013 / 5:20 PM / 5 years ago

UPDATE 2-Chile cenbank flags strong domestic demand growth as risk

* Domestic demand growth outpacing GDP growth

* Situation could lead to widening of current account deficit

* Inflationary pressures under control despite strong demand

SANTIAGO, March 22 (Reuters) - The main local risk to Chile’s economy is that growth in domestic demand continues to outpace gross domestic product growth, central bank board member Enrique Marshall said on Friday.

Chile’s robust economy expanded 5.6 percent in all of last year, while ebullient domestic demand increased 7.1 percent.

“Internally, the main risk is that demand continues to grow at a rhythm superior to GDP, which would lead to a growth of the current account deficit,” Marshall said in a presentation posted on the central bank’s website.

He added that partial retail data suggests that strength in local demand will continue during the first three months of 2013.

Chile’s current account deficit grew roughly three-fold last year to $9.497 billion, equivalent to 3.5 percent of annual GDP, as the surplus in the nation’s trade balance fell sharply.

Many analysts have flagged Chile’s growing current account deficit as a worry.

Externally, the euro zone’s “fragile situation” poses the main risk to world No.1 copper producer Chile’s economy, Marshall said.

Regarding Chile’s peso, the bank board member said that the real exchange rate was on the low end of values coherent with its long-term fundamentals.

The real exchange rate is a measure used by the central bank in part to gauge Chilean exports’ competitiveness.

The peso, which ranked among the strongest foreign currency performers against the U.S. dollar among 152 currencies tracked by Reuters after appreciating 8.48 percent last year, has continued to firm in 2013.

It has been boosted by Chile’s attractive rate differential, healthy prices for top export copper, and brisk economic growth.

Booming domestic demand, though, has so far not triggered price pressures.

“Nearly all of inflation’s components have displayed a downward trajectory in recent months,” Marshall said.

Inflation in the 12 months through February was 1.3 percent, the lowest 12-month figure since at least January 2011.

The central bank has kept its benchmark lending rate steady at 5.0 percent since a surprise cut in January 2012, as buoyant growth, low inflation and a strong peso currency versus persistent economic threats from abroad keep its hands tied. Its wait-and-see-stance has become trickier in recent weeks.

Traders polled by the bank see the rate creeping up to 5.25 percent in 12 months, while analysts polled by the bank see it at that level within 11 months.

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