Nov. 10 (Bloomberg) -- Chile's central bank raised its benchmark lending rate to its highest level in more than three years in a bid to curb a pickup in inflation that has been sparked by surging oil prices and rising consumer demand.

Policy makers lifted the overnight lending rate by a quarter-percentage point to 4.5 percent, the 11th increase since September 2004. The rise was in line with the median forecast in a Bloomberg survey of 15 analysts.

``Financing conditions in Chile remain expansive,'' the central bank said in a statement after it concluded its policy meeting. ``Investment remains strong and employment continues to grow at high rates.''

The rise in interest rates will rein in a surge in bank lending to consumers that has helped lead the economic expansion in the South American country, said Luis Cancino, head of currency and debt trading at Scotiabank Sud Americano in Santiago. Distribucion y Servicio D&S SA, Chile's biggest supermarket chain, reported that revenue from its store-brand credit card more than doubled in the third quarter.

Cancino said he expects the rise in benchmark lending rates to start to crimp consumer spending in the second quarter of next year.

``We could still see strong consumption numbers through'' the first quarter Cancino said. ``Consumers don't leave the party until they have to. If inflation remains high, it's like a party that's gone on too long. There's a risk that we'll see defaults.''

Shares Decline

Concern about the increase in interest rates has caused retail stocks to tumble on the Santiago stock exchange over the past six weeks, said Jordi Gaju, chief strategist at Penta Estrategia e Inversiones in Santiago.

D&S shares have fallen 10.2 percent since Oct. 3 while shares of S.A.C.I. Falabella SA, which owns the country's biggest department chain, dropped 10.9 percent, more than the 7.7 percent decline in the benchmark stock exchange index.

``When rates go up, the reaction is to spend less,'' Gaju said. ``Sales for retailers aren't going to grow as much next year because of rising rates.''

Chilean central bankers have raised the overnight rate from a record low of 1.75 percent in September 2004 to check inflation. The annual inflation rate jumped to a 2 1/2-year high of 4.1 percent in October from 1.9 percent a year earlier.

Peso Rally

``Interest rates were at historic lows and they are still stimulating growth,'' Finance Minister Nicolas Eyzaguirre said at a press conference on Nov. 4.

The bank said today that it expects inflation to remain above 4 percent, which is higher than its 2 percent to 4 percent target range, through the first quarter of 2006. Inflation excluded oil and certain foods remains ``under control,'' the bank said in its statement.

The government forecasts the economy will grow at least 6 percent this year for the second straight year. A rally in the price of copper, Chile's biggest export, has helped spark that growth. The government predicts that economic growth will slow to 5.5 percent in 2006 as copper prices fall.

``You still have pressure on inflation from the demand side,'' said Pedro Tuesta, senior Latin America economist with 4Cast Inc. in New York. ``The central bank will keep its moderate pace of monetary tightening.''

The jump in copper exports and the rise in interest rates, which has made Chilean fixed-income investments more attractive, has sparked a 14 percent rally in the peso over the past 12 months. That's the second-biggest gainer among the 60 currencies Bloomberg tracks against the dollar. The peso rose 0.9 percent today to 527.5 pesos to the dollar at 4:40 p.m. New York time.

To contact the reporter on this story: Matthew Walter in Santiago at Mwalter4@bloomberg.net

Last Updated: November 10, 2005 16:57 EST