(Updates with President Pinera comment)

By Antonio de la Jara and Simon Gardner

SANTIAGO (Reuters) - Chile's economy grew more than
expected in June though the pace of recovery from a massive
earthquake is slowing, data showed on Thursday, as the central
bank signaled more interest rate hikes are on the way.

The economy grew a seasonally adjusted 0.8 percent in June
versus May, driven by retail and wholesale trade, transport,
electricity, and gas and water. Market expectations were for a
0.3 percent expansion.

The pace slowed, however, compared with May's 1.4 percent

On a year-on-year basis, the IMACEC indicator
of economic activity in Chile, the world's top copper producer,
rose 6.8 percent. That topped market forecasts for growth of
6.0 percent and exceeds May's 7.1 percent expansion from a year

"What you can foresee going forward is that the process of
withdrawing monetary stimulus should continue," Central Bank
President Jose De Gregorio told a business seminar on Thursday,
adding the economy should expand by around 6 percent in the
second half of the year compared with the year-earlier period.

While analysts have widely been expecting the central bank
to opt for a third straight monthly rate increase of 50 basis
points when it meets on Aug. 12, interest rate futures show
market expectations for the year-end are rising.

"In the April-June quarter, the first quarter of our
government, the economy has recovered its capacity for growth,"
President Sebastian Pinera told reporters, saying the June data
implied the economy expanded 6.2 percent in the second

"It also means we have recovered the levels of activity we
had before the financial crisis struck our country last year,"
added the center-right president, who took power in March.

The economy had contracted 4.3 percent in June 2009 from a
year earlier, though it expanded 0.9 percent compared to the
immediately prior month.

The growth data helped boost Chilean stock benchmark IPSA
index around 0.3 percent to new life intraday highs,.

Chile's peso advanced 0.41 percent, on both
the Imacec data and a weaker dollar abroad as well as on
expectations local consumer price data for July due on Friday
could come in above expectations and prompt a more aggressive
rate hike.


Chile has joined Brazil and Peru in a regional monetary
tightening cycle with two consecutive 50 basis point increases
since June, after holding its benchmark rate at a record low in
the wake of the global financial crisis and then a devastating

The central bank benchmark rate is now 1.5 percent.

Alberto Ramos, senior economist at Goldman Sachs in New
York, is eyeing a 50 basis point increase coming from next
Thursday's central bank policy meeting.

But he says the bank could discuss accelerating the pace of
rate normalization if July's consumer price index surprises to
the upside.

A Reuters survey forecast prices will rise 0.7 percent.

But the surprisingly strong IMACEC rise reported on
Thursday prompted Santiago's BCI brokerage to reaffirm in a
research note that it expected a 75 basis point hike on Aug.

Minutes of the bank's July meeting published this week
showed external risks discouraged the central bank from
speeding up the pace of rate hikes at its policy meeting in
(Additional reporting by Maria Jose Latorre, Brad Haynes and
Bianca Frigiani; Editing by Leslie Adler)