Chile blue-chip stocks down sharply on inflation data

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SANTIAGO, July 3 (Reuters) - Chilean shares fell sharply in early trade on Thursday after consumer prices for June rose at their highest rate for the month in 17 years, reinforcing expectations for an interest rate hike next week.

The blue-chip IPSA index .IPSA slid 2.6 percent to 2,766 points by 1418 GMT while the all-market IGPA .IGPA index fell 2.06 percent to 13,562 points.

June consumer prices rose 1.5 percent in June, well above the expectations of 1.2 percent of nine analysts and economists polled by Reuters this week, and compared to a 1.2 percent rise in May.

Among the stocks that fell hardest on Thursday were Chile's biggest steel and iron ore producer CAP CAP.SN, down 8.74 percent, and SQM SQM_pb.SN, the world's leading producer of iodine and lithium, down 8.59 percent. The two companies are among the biggest gainer on the Santiago bourse this year.

The jump in consumer prices complicates Chile's economic scenario as the economy cools even as inflation ploughs forward. Central Bank President Jose De Gregorio said on Wednesday inflation is the economy's biggest problem, and was converging on the bank's 3 percent target more slowly than expected.

He also said that given inflationary pressures, he could not rule out further interest rate increases.

"Despite weak growth, we expect that on July 10 monetary (central bank) authorities will raise rates another 50 basis points, taking the benchmark rate toward 7.25 percent, and with potential further rises," a Bci brokerage trader said.

More rate hikes mean a wider interest rate gap with the United States, attracting more investors to Chile and potentially strengthening the currency.

The currency has now fallen 3.71 percent this year and has depreciated around 17 percent since the central bank introduced an $8 billion intervention program in April to curb peso strength after the dollar fell to 430 pesos in March. (Reporting by Manuel Farias; Writing by Pav Jordan; Editing by Tom Hals)