UPDATE 1-Peru central bank keeps base rate steady for 27th month

Thu Aug 8, 2013 8:05pm EDT

Related Topics

LIMA Aug 8 (Reuters) - Peru's central bank kept its benchmark interest rate unchanged at 4.25 percent on Thursday for the 27th straight month as inflation is expected to cool in coming months and the economy grows near its potential.

All 14 economists surveyed by Reuters had predicted the central bank would again keep the rate steady.

The decision to hold came after inflation in July rose above the upper limit of the central bank's 1-3 percent target range and the economy expanded less than expected in recent months.

The central bank appeared slightly more concerned about the impact of weak global growth on the economy than about July's price spike, which it attributed to seasonal supply factors.

The monetary authority said if needed, it would continue to loosen reserve requirements on banks as it has since April to stimulate lending and free up funds.

Peru has enjoyed an economic boom over the past decade, driven in large part by its mineral exports, but softer demand from China and Europe and weaker gold and copper prices have slowed growth this year.

The economy expanded 5.41 percent in the first five months of this year and 5 percent in May compared to the same periods last year. Data for growth in June will be released next week.

"Current and preliminary indicators of productive activity show Peruvian economic growth close to its long-term sustainable level, though indicators linked to external markets still show a weak performance, affecting prices and volumes of exports," the central bank said in a statement on Thursday.

Last year the economy grew at a 6.3 percent clip - one of the fastest rates in the region - on strong domestic demand and construction activity that offset weaker exports.

The central bank and government expect economic growth this year of around 6 percent, though some private sector observers have trimmed their forecasts to firmly below 6 percent.

Peru's potential growth rate, the maximum rate the economy can expand without provoking excessive inflation, is normally seen at around 6 percent or 6.5 percent.

Consumer prices jumped 0.55 percent in July and annual inflation rose to 3.24 percent, surpassing the central bank's targeted upper limit goal for the first time in nine months.

The central bank said it expects inflation to slow back below 3 percent in coming months.

"Inflation is projected to return to the target range in the third quarter as supply conditions for food improve," the central bank said.

FILED UNDER: