Peru central bank sees 6-7 percent growth

LIMA Wed May 5, 2010 6:24pm EDT

LIMA (Reuters) - Peru's economy will grow between 6.0 and 7.0 percent this year and the IMF believes it will be the top performer in Latin America as domestic demand and exports surge, the head of the central bank said on Wednesday.

Julio Velarde, who spoke at the Reuters Latin American Investment Summit in Lima, said that given the good health of the economy, the central bank is likely to tighten monetary policy this year.

"We don't need to foster private consumption with expansive (monetary) policies, we should move to a more neutral terrain," he said, adding that although it is too early to say when or to what extent, the central bank could raise rates or increase deposit requirements.

Its next meeting on the country's base rate, which has been steady at 1.25 percent since August, is slated for Thursday.

He declined to discuss timelines, but said: "One difference between other central banks and us is that we don't just use interest rates, but also deposit requirements. It's a mix of different monetary policy instruments."

Velarde said the central bank forecasts that the economy will expand 6.8 percent in the second quarter and sees full year growth at between 6.0 and 7.0 percent.

"Basically fueled by domestic demand picking up, but also because we are returning to the export levels we had back in 2008," he said.

Peru's economy grew nearly 10 percent in both 2007 and 2008, although growth slowed down sharply last year as the global economic downturn slammed prices for Peru's metals exports and cooled domestic demand.

"We have to make sure that optimism does not turn into euphoria. That could lead people to believe that we're going to grow 10 percent again," which Velarde said would not be a realistic expectation.

Earlier this year the pro-business government of President Alan Garcia forecasted economic growth at 5.5 percent in 2010.

"It's often the case that following a crisis it takes quite a while to recover trust, optimism regarding the economy. But ... we have done so quickly," said Velarde.

GREEK CRISIS

Velarde sees inflation at slightly above 2.0 percent this year, but he said the central bank will not hesitate to raise the benchmark interest rate if consumer prices raise substantially.

Velarde said fiscal and current accounts are very healthy.

"This year (fiscal) deficit will be at 1.6 percent of GDP and likely to go down next year ... trade balance will likely be around $8.5 billion," he said.

He said that no country in the world would escape unscathed if the International Monetary Fund and the European Union fail to contain the financial crisis in Greece.

"A sovereign debt default in Greece right now ... could drag down other countries with irreversible consequences. We trust that this won't happen," he said at the Central Bank headquarters in downtown Lima.

The economist sees sustainable economic in the United States helping global economic recovery and said that uncertainty about a global economic rebound is dissipating.

(Reporting by Teresa Cespedes and Eduardo Garcia)