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A giant Chilean flag is hoisted in front of the Government Palace in Santiago� Victor Ruiz Caballero / Reuter/Reuters

Chile's central bank surprised markets by raising its benchmark interest rate an aggressive 50 basis points for the third month running, defying forecasts for a more moderate hike as it battles inflation expectations.

The rate now stands at 5 per cent, its highest level in more than two years, and the bank said more increases would be needed.

Pricey global food and fuel products, combined with fast growth, have triggered rate hikes across the emerging world although wild swings in commodity prices have left many central bankers unsure about the outlook.

Chile is the most exposed of Latin America's economies to volatile international oil prices, importing 99 per cent of its fuel needs.

Markets were betting heavily on a 25-basis-point increase in Chile's rate after private 12-month inflation expectations eased back within the bank's 2 to 4 per cent tolerance range. The bank's inflation target is 3 per cent.

"This is surprising. There are few output gaps, the labour market is pretty tight and there's always the risk of supply shocks. They have prioritized that over the peso," said Matias Madrid, chief economist at Banco Penta in Santiago.

Analysts expected the peso to firm in the very near-term on the back of the strong hike, but expected gains to be transitory.

The bank's rate statement made no mention of the peso, which is trading near three-year highs despite a $12-billion (U.S.) central bank currency intervention program for 2011 launched in January.

"Private inflation expectations show a reversal, though remain above the target," the central bank said in a statement. "The board thinks additional increases in the monetary policy rate will be necessary, the size and timing of which will depend on the evolution of macroeconomic conditions domestically and abroad."

Private inflation expectations have also eased in Latin America's largest economy, Brazil, where many analysts see its central bank sticking with more moderate 25-basis-point increases. Peru's central bank is expected to raise its key rate by 25 basis points later on Thursday.

Peru's central bank raised its benchmark interest rate to 4.25 per cent from 4 per cent on Thursday, its fifth straight monthly hike, as it aims to keep inflation within its annual target range.

Chilean markets see inflation stable at 0.4 per cent in May and 12-month inflation through next May at 3.9 per cent, a new central bank poll of traders showed on Wednesday. Inflation in the 12 months to April was 3.2 per cent.

However, some analysts see inflation pressure picking up in coming months after bread makers in the capital, Santiago, threatened hefty price increases to make up for the higher cost of imported wheat.

The International Monetary Fund's top regional official warned on Thursday that Latin America's economic boom could end in a "full-blown" crisis unless the region's governments properly manage the situation.

Nicolas Eyzaguirre, the IMF's director for the western hemisphere, urged policy makers to take steps to keep their economies from overheating by trimming public spending, maintaining sound monetary policy and setting aside as much of the windfall from the current boom as possible.

China on Thursday took new steps to cool its economy by requiring banks to hold on to more of their deposits rather than lend them out as loans.

Brazilian central bank president Alexandre Tombini said on Thursday he was committed to bringing inflation as close as possible to the center of the government's target this year.

Consumer prices in Peru rose 0.68 per cent in April, close to a 0.7 per cent rise in March which was the fastest pace in nearly three years. Higher international commodities prices have pushed Peru's 12-month inflation above the bank's 1 to 3 per cent target range.

Peruvian central bank head Julio Velarde said on Monday Peru's inflation could be "relatively low in May.

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