November 9, 2012 / 12:15 AM / in 5 years

RPT-UPDATE 1-Peru central bank holds base rate at 4.25 percent

LIMA, Nov 8 (Reuters) - Peru’s central bank held its benchmark interest rate steady at 4.25 percent for the 18th month in a row on Thursday, as inflation has retreated and the economy grows near its potential.

All 16 economists surveyed by Reuters had predicted the rate would once again be left unchanged in South America’s fasted-paced economy.

Consumer prices fell in October, easing inflation after several months of sharper-than-expected price increases. Interannual inflation in October was 3.25 percent, even as the economy continues on track to expand 6 percent this year.

“This decision recognizes the divergence of inflation due to temporary supply factors, domestic growth near its potential, and ongoing uncertainty in external markets,” the central bank said in a statement.

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

The central bank avoided specifying a timeline for when inflation might reach target. Central Bank President Julio Velarde said on previous occasions that it would slow to just under 3 percent by the end of the year.

Seasonal price spikes for locally grown foods and external shocks earlier this year pushed inflation up to 3.74 percent in the 12 months through September.

“In October, better supply conditions for perishable goods contributed to a reversal of supply shocks that were temporarily affecting inflation,” the central bank said. “Inflation will come back into the target range, gradually easing toward 2 percent.”

The central bank has described its current monetary stance as slightly tighter than neutral. It has raised bank reserve requirements four times this year to discourage speculative capital inflows and to slow a rapid credit expansion.

The country is a top exporter of minerals, which drive 60 percent of its international shipments. But exports have slumped in recent months, and a domestic construction and consumption boom is now leading expansion.

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