September 7, 2016 / 3:34 PM / 2 years ago

UPDATE 2-Chile central bank lowers 2017 growth forecast

(Recasts; adds comments from central bank president)

By Anthony Esposito and Antonio De la Jara

SANTIAGO, Sept 7 (Reuters) - Chile’s central bank on Wednesday revised lower its estimate for economic growth for 2017, adding that it does not foresee a need to hike the benchmark interest rate over the coming two-year policy horizon.

Full-year growth in the world’s top copper exporter is now expected at between 1.75 percent and 2.75 percent for 2017, slightly below the central bank’s previous forecast range of 2.0 percent to 3.0 percent.

An expansion at that rate would be up from a likely 1.5 percent to 2.0 percent growth this year, the central bank said in its quarterly Monetary Policy Report (IPoM) report.

“On the domestic front, the main concern has to do with the low growth the Chilean economy is facing,” said Central Bank President Rodrigo Vergara. “If this scenario (the bank is projecting) comes true, it will mark four straight years of annual growth of around 2.0 percent.”

The bank noted that labor market has deteriorated gradually and that business and consumer expectations remain at pessimistic levels.

Inflation is expected to end the year at 3.5 percent, within the bank’s target range of 2 percent to 4 percent, and then ease further to 3.1 percent in 2017.

The central bank, which has kept the benchmark interest rate on hold at 3.5 percent since December, recently removed its bias toward future hikes in favor of a neutral stance, as inflation has cooled while the economy remains tepid.

“There seems to be no need for new hikes to the monetary policy rate over the (two-year) policy horizon” if recent economic trends continue, it said.

The central bank also said it expects the government to put a lid on public spending.

“When our projections say that we expect the fiscal rule and fiscal commitments to be met by the government, that translates into an increase in public spending of around 3 percent,” said Vergara.

Chilean economic activity rose 0.5 percent in July from the same month last year, below even the most pessimistic forecasts, as growth in the services and retail sectors was weighed down by declines in manufacturing and mining. (Reporting by Anthony Esposito and Antonio de la Jara, editing by G Crosse)

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