UPDATE 2-Peru's central bank sees weaker growth, wider trade gap in 2014

Fri Jul 18, 2014 6:20pm EDT

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(Adds central bank's revised potential growth rate, details)

By Patricia Velez and Teresa Cespedes

LIMA, July 18 (Reuters) - Peru's central bank slashed its view of this year's economic expansion to 4.4 percent from 5.5 percent in a quarterly report on Friday, forecasting a drop in mining activity and a ballooning trade deficit.

The central bank's new outlook for this year's expansion maintains its view that economic activity will pick up in the second half of 2014. Growth posted so far this year, between January and May, was 3.57 percent compared with the same period in 2013.

Growth expectations for Peru, one of Latin America's most robust economies, have dimmed because of weaker prices and softer demand for its mineral products.

The Andean country's economy surged at rates topping 6 percent on the back of the global commodities boom during most of the past decade.

A 4.4 percent growth would be its weakest since 2009, when it stumbled as a result of the global financial crisis.

Last year Peru's economy grew 5.8 percent.

The central bank said it now sees a 6 percent expansion instead of 6.7 percent in 2015.

Central Bank President Julio Velarde said at a news conference on Friday that the central bank now sees Peru's potential growth rate - the pace at which the economy can expand without stoking inflation - at no more than 5 percent.

The central bank previously considered that rate 6 percent.

Last week the central bank lowered the benchmark interest rate to encourage growth, its first cut since November. The monetary authority has said it could reduce the key rate further if the economic lull drags on.

Sluggish growth threatens to slow the steady retreat of the poverty rate in recent years, and comes as President Ollanta Humala faces the lowest approval ratings of his three years in office.

Last week, Humala announced plans to introduce another economic reform package that will build on recently passed measures to cut red tape and lure mining investment.

The central bank said mining activity is set to shrink 1.1 percent this year and mining investment 4.3 percent, likely leading to bigger current account and trade deficits.

The central bank's updated view for a $2.6 billion trade deficit this year is nearly triple its April estimate.

Peru is a top producer of copper, gold and silver. Mining makes up nearly 15 percent of GDP and about 60 percent of export earnings.

Domestic demand, which has cushioned tumbling exports in recent years, will likely grow by 4.7 percent this year, the bank said. Private investment will likely rise 3.2 percent.

Velarde also said that the bank has raised its view of inflation for 2014 to 2.8 percent from 2.5 to 2.6 percent - within its 1 percent to 3 percent target range.

The central bank also raised its view of this year's current account deficit to 4.8 percent of GDP from 4.3 percent, and trimmed its view of this year's fiscal surplus to 0.2 percent of GDP from 0.3 percent. (Reporting by Patricia Velez and Teresa Cespedes; Editing by Mohammad Zargham)

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