(Adds central bank comments, context)
By Anthony Esposito and Antonio De la Jara
SANTIAGO, June 6 (Reuters) - Chile’s central bank on Monday lowered its economic growth forecast for 2016 due to weakness in the key mining sector and a drop in investments, adding that any hikes to the benchmark interest rate would occur at a somewhat slower pace than previously thought.
The bank, in its quarterly Monetary Policy Report (IPoM), cut its 2016 gross domestic product growth projection to a range of 1.25-2.0 percent from a previous view of 1.25-2.25 percent. It left its forecast for 2017 economic growth unchanged at 2.0-3.0 percent.
“We expect the economy to continue growing below its potential for a few more quarters, impacted in particular by the weak performance of those sectors most dependent on investment ... The process of normalization for economic growth will be slow,” said the bank.
Policymakers said they were “concerned” about the evolution of investment, especially weakness in the mining sector.
For this year, different indicators point to another drop in investment, with a recovery in non-mining investment seen towards 2017, said the bank.
Cooling demand in top metals consumer China has led to a rout in the copper market and crimped investment in Chile, the world’s top copper producer.
On the benchmark interest rate, the bank said it ”will continue normalizing the monetary policy rate within the (two-year) policy horizon, in line with the forecasts for the economy during that period, but at a somewhat slower pace than what we considered in March.
Since hiking the key rate by 25 basis points last December to its current 3.5 percent, the bank has left it unchanged as it juggles soft economic growth with stubbornly high inflation.
The bank said it saw annual inflation - which for two years has mostly remained above its 4 percent tolerance ceiling - easing in coming months. As previously, it forecast 2016 inflation at 3.6 percent and 3.0 percent in 2017.
“In the most likely scenario, annual inflation will ease into the tolerance range in the third quarter this year and will continue easing to around 3 percent in the first half of 2017,” said the report.
The bank said it expected that the labor market, which had remained resilient despite the economy’s woes, will deteriorate on the back of subdued economic growth and falling investment. (Reporting by Anthony Esposito & Antonio de la Jara; Editing by W Simon)