Chile's economic activity falls unexpectedly in February, dimming rate hike chances

By Natalia A. Ramos Miranda and Aida Pelaez-Fernandez

SANTIAGO, April 1 (Reuters) - Chile's economic activity deteriorated in February, falling for the second consecutive month and landing way below market expectations, dimming the outlook for interest rate hikes.

The IMACEC index, which accounts for about 90% of the Andean country's gross domestic product, posted a 0.3% annual fall in February, central bank data showed on Wednesday, below economists' forecasts in a Reuters poll of a 1.9% year-on-year expansion.

Economic activity deteriorated from its level the previous month when it recorded a 0.1% drop, marking its second consecutive monthly decline after an 18-month growth streak.

"The probability of seeing a rise in the TPM (interest rate) this year has decreased significantly," Scotiabank analysts said in a note, adding the economic stagnation, coupled with slack in the labor market, supports the central bank's position of keeping rates on hold.

The central bank is "awaiting developments in the external environment and their impact on the local economy," the note added.

Chile's central bank held its benchmark interest rate at 4.5% last month amid higher oil prices and inflation expectations linked to the war in the Middle East.

Economic activity in Chile was weighed down by goods production that posted a 3.7% annual drop, including a 5.4% annual decline in other goods.

"A lower output in fruit growing and extractive fishing drove the performance of other goods, while the manufacturing sector saw a decline in the processing of fishery products," the central bank said.

Mining activity in the world's top copper producer rose 1% year-on-year in February, supported by higher lithium and gold output, which offset a decline in copper production, the bank added.

"We expect economic activity to regain momentum in the second half of the year," analysts at Santander Chile said.

On a monthly basis, economic activity in the Andean country also registered a 0.3% decrease, official data showed. (Reporting by Aida Pelaez-Fernandez and Natalia Ramos; Editing by Andrew Heavens, Louise Heavens and Chris Reese)