By Anthony Esposito and Antonio De la Jara
SANTIAGO (Reuters) - Chile's central bank has managed monetary policy with a "flexible bias" as it juggles above-target inflation and subdued economic growth, which could lead it to further delay any new interest rate hikes, the bank's chief told Reuters on Tuesday.
While the bank has left its key rate on hold at 3.5 percent in 2016, following two 25-basis-point hikes late last year, traders and economists widely see two additional increases, to 4.0 percent, within two years.
"Our bias ... is a flexible bias in the sense that it refers to the normalization of monetary policy. But the velocity of that normalization will depend on what is happening in the economy," Central Bank President Rodrigo Vergara said in an interview.
"There are certain indicators that point to the possibility that this period of (rate) holds will be longer than originally expected," said Vergara, underscoring that no such decision has yet been made.
According to the bank's most recent forecasts, annual inflation - which for two years has mostly remained above the bank's 4 percent tolerance ceiling - is expected to ease in coming months and end 2016 at 3.6 percent.
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"These two years with inflation above target is obviously not something that we are comfortable with and it is something we are particularly vigilant about," said Vergara.
Asked if the Chilean peso currency's recent appreciation would help ease inflationary pressures, Vergara said that "betting too much on that appreciation from an inflationary point of view could be risky; time will tell if this is something more permanent or more transitory."
Until recently, the labor market was one of the few bright spots in Chile's economy, but the jobless rate shot up to a 4-1/2-year high of 6.8 percent in the March to May period.
Vergara said further deterioration is expected and the unemployment rate could climb as high as 7.4 or 7.5 percent.
Additionally, the economy of top copper exporter Chile has been encumbered by falling investment, weakness in the key mining sector and consumer and business pessimism.
Vergara said the bank was "concerned" with sentiment levels. "In order for the economy to start recovering it's important for those levels to improve."
With gross domestic product growth projected to grow 1.25 to 2.0 percent this year, before accelerating to between 2.0 and 3.0 percent in 2017, the fallout from Britain's vote to leave the European Union and continued weak sentiment could lead those forecasts to be revised.
"Because the cards have already been played for this year, (the forecast) is unlikely to change much, but for next year's projection there has been some news that is not favorable for growth," Vergara said.
Vergara said any new projections on growth or policy will have to wait for the bank's next quarterly Monetary Policy Report.
(Reporting by Anthony Esposito & Antonio de la Jara; Editing by James Dalgleish)