Peru central bank may clamp down again

By Terry Wade

LIMA (Reuters) - Peru may further tighten monetary policy if inflation speeds up, Central Bank President Julio Velarde said on Friday, adding that the Andean economy could overheat despite a U.S. slowdown.

Inflation spiked 0.91 percent in February, a four-year high that pushed inflation for the 12 months through February to 4.8 percent. Economists are waiting to see if inflation will ease in March, or get worse.

"If inflationary pressures start to accelerate, we will take measures, and among those could be the interest rate or bank deposit requirements," said Velarde, who spoke in Lima at the Reuters Latin America Investment Summit. "We aren't ruling anything out."

To curb inflation, the central bank raised deposit requirements for banks in January and March, and in previous months raised its benchmark rate, now at 5.25 percent.

The finance ministry has also helped out by slashing tariffs on food imports, lowering fuel taxes, and cutting spending to put a damper on inflation.

Velarde has lately leaned in favor of raising deposit requirements, rather than interest rates. Higher rates could cause currency appreciation, which in turn would create risks for borrowers and lenders if the Peruvian sol later depreciates. About half of all loans in Peru are in dollars.

"When we intervene to slow currency volatility, it's in large part because we are worried about what could happen with the financial system," he said. "If the U.S. economy doesn't just slow down but enters a recession that drags down commodities prices, we worry our currency could depreciate."

GROWTH, OVERHEATING

Velarde said the Andean economy, which grew 9 percent last year, could overheat if domestic demand continues to surge. Last year, domestic demand led growth, an unusual trend for a country that has long relied on exporting minerals.

"There is a risk of overheating if internal demand keeps growing at a double-digit pace," he said.

Velarde said he expects the economy to grow 7.5 percent in 2008, higher than a previous estimate of 7 percent. The central bank also said it expects economic growth of 9.5 percent in February, up from the same month a year ago.

The central bank's inflation target is 2 percent, plus or minus a 1 percentage-point tolerance band. Last year inflation was nearly 4 percent.

"Obviously, I'm concerned about inflationary pressure, but I don't think there's any chance we will lose control of it," he said. "I'm convinced that it could take a while to return to the (target) range but we will return to it."

Most of the recent inflation has come from food imports, for products like wheat.

"With monetary policy measures, I can't avoid the inflation attack that comes from abroad and the jump in food prices," Velarde said.