April 21, 2008 / 10:48 PM / 11 years ago

Amid boom, Peru cenbank might further tighten policy

LIMA, April 21 (Reuters) - Peru’s Central Bank President Julio Velarde said on Monday the bank could further raise reserve requirements for bank accounts owned by foreign investment funds, to curb inflows of so-called hot money as the Andean economy booms.

Earlier this month, the bank said it would raise the requirements on these accounts to 120 percent from 40 percent, starting in May, in order to slow foreign flows, entering Peru to take advantage of the surging sol PEN=PE, the local currency.

The bank has said it wants to slow the sol’s appreciation, which could cause trouble for banks and lenders if the sol were to enter a depreciation cycle.

“We will not hesitate to raise (the requirements) to 150, 200, 240, 500 700, 1,000 percent — this is the message,” said Velarde.

Most analysts expect the sol to continue to gain on sound economic fundamentals, despite the bank’s moves to squeeze speculative capital out of the market, though the currency fell on Monday and the exchange rate has been volatile since the rule change on reserve requirements was announced.

Also on Monday, Velarde said Peru will likely grow 8 percent in 2008, raising an earlier projection of 7.5 percent.

Last year, Peru’s economy, one of the fastest-growing in the world, expanded some 9 percent, pushed by strong internal demand.

Peru’s economy grew 10.06 percent in January and 11.92 percent in February of this year.

Velarde upped his estimate of Peru’s first-quarter growth in 2008 to 10.3 percent, from 9.5 percent.

But as the country enjoys double-digit growth, some officials and analysts worry whether the boom might be too much, too soon.

In an interview with Reuters late last month, Velarde recognized the economy could overheat if internal demand continues to surge.

Also, inflation, as measured as a price index for metropolitan Lima, has started to pick up, swelling some 2.18 percent in the first three months of 2008.

In the 12 months that ended in March, inflation hit 5.5 percent.

The bank’s annual target is 2 percent, plus or minus one percentage point. (Reporting by Jean Luis Arce; Writing by Teresa Cespedes and Dana Ford; Editing by Diane Craft)

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