* Industry falls vs Jan on slump in manufacturing
* Copper down sharply on lower ore grades, mill problems
* Finance Minister sees strong March, Q1, no overheating
* Reuters poll sees slower IMACEC Feb economic growth (Adds Finance Minister comment, Reuters poll)
By Antonio de la Jara and Moises Avila
SANTIAGO, March 30 (Reuters) - Chile's industrial production (CLIP=ECI: Quote, Profile, Research) fell in February compared with January and posted its weakest annual growth rate in months, according to government data which prompted more bets the central bank will scale back interest rate hikes.
Copper output, the backbone of Chile's exports, also plunged in February compared with a year earlier, on lower ore grades and mill problems, the government statistics agency INE said on Wednesday.
Industrial output fell a seasonally-adjusted 1.1 percent in February from January and rose a much lower-than-expected 1.9 percent compared with the same month last year, its slowest annual pace since October. Market expectations had pointed to a 4.5 percent increase from a year ago. For a preview, see [ID:nN28209105]
It was the second straight month-on-month fall in industrial production. The INE reported last month that seasonally adjusted industry output fell 0.5 percent in January from December and rose a lower-than-expected 4 percent from a year earlier. [ID:nN28250708]
"We have a drop in dynamism of the industrial sector and in mining output, but we also see a continuous recovery in the construction sector," Finance Minister Felipe Larrain said, citing isolated factors like food due to an apparent drawdown of inventories.
"We are going to see some very positive figures in March ... and a strong quarter," Larrain added. "(But) we are not overheating. Investment remains strong."
Chile's peso was stable following the data, but traders said the weaker-than-expected output figure supported a bias in interest rate futures towards signaling a 25 basis point increase at next month's rate-setting meeting rather than a more aggressive 50 basis points the market is expecting to tame inflation. [ID:nN23232413] [ID:nN17171992]
"While internal and external demand continue to be favorable, manufacturing grew at a slower pace than in previous months," state statistics agency INE said, referring to the year-on-year data..
"Mining shows a fall, and construction does not yet show clear signs of recovery," it added. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ > For full coverage, please click on [ID:nN30113748] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
However, INE also reported a 16.8 percent surge in Chilean retail sales and a 10.7 percent jump in supermarket sales in February, compared with a year earlier.
Taken together, the downbeat production data outweighed the upbeat statistical sales figures in terms of economic growth projections, in the view of Bice Inversiones, a Santiago-based brokerage.
Bice said it was was lowering its estimate for Chile's overall economic growth for February, as gauged by the central bank's IMACEC figure. The IMACEC, which measures about about 90 percent of economic activity, is due to be released for February on April 5.
"Despite the favorable evolution of consumption indicators, the performance of industry and mining lead us to revise down our Imacec economic activity forecast for February to a 5.8 percent year on year increase," BICE said in a note.
Chile's economic activity is seen rising 5.8 percent in February, lower than earlier market estimates, in light of the February output data. [ID:nN30150958], according to the median forecast of 14 analysts and economists surveyed in a Reuters poll.
Before Wednesday's release of the INE data, the market had been expecting a 6.8 percent IMACEC figure for February, in line with January's pace. [ID:nSGO002160].
Chile's copper output (CLCOPP=ECI: Quote, Profile, Research) fell 6.6 percent in February compared with a year earlier to 368,243 tonnes, the INE said.
Chile, which holds by far the world's top copper reserves and is the globe's No.1 producer, is expected to steadily increase output in the next two years on new mine projects and upgrades.
For the INE's report on February industrial and mining output, please go to: http://www.ine.cl/filenews/files/2011/marzo/pdf/sect-xwtk.pdf ( Writing by Simon Gardner, Editing by W Simon)
WRAPUP 3-Chile Feb industry falls vs Jan,copper output dives
