August 19, 2015 / 9:54 PM / 5 years ago

UPDATE 1-Peru central bank wary of U.S. rate hike, defends interventions

* Central bank says has plenty of reserves to soften sol’s slide

* Interventions aim to tame inflation and protect recovery

* Velarde says currency depreciation should ease after Fed hike (Recasts to focus on Velarde’s defense of interventions, adds comments on inflation, economic recovery)

By Teresa Cespedes

LIMA, Aug 19 (Reuters) - The chief of Peru’s central bank on Wednesday defended the monetary authority’s nearly daily interventions in the currency market, citing its increasing uneasiness over an expected interest rate hike in the United States.

“We really have growing fears with respect to the impact on the withdrawal of monetary stimulus in the U.S.,” Julio Velarde told reporters on the sidelines of an event.

Velarde said the central bank still has plenty of dollar reserves it can sell in the spot market to soften the sol’s losses against the dollar.

The bank bought some $13 billion in 2012 when the sol was appreciating. Since then, it has sold less than $10 billion, he said.

“We still haven’t used what we bought during the last year the sol was strengthening,” Velarde said.

The central bank has ramped up its dollar sales in recent weeks. It sold more than half a billion in the past week as the sol has set a new six-year low daily.

Velarde said the interventions were needed to tame inflation that is sensitive to currency swings in Peru.

“The reason we intervene is because credits ... and prices ... are still highly dollarized,” Velarde said.

He said abrupt currency changes also threaten the economic recovery.

Peru’s economy, which is fueled by mining, expanded by 3 percent in the second quarter on the year, the best pace in more than a year. But annual growth of 1.92 percent in June was well below the potential rate the central bank put at 5 percent in February.

“We’re seeing that the potential growth rate is falling,” Velarde said. “At times when the economy is weak, currency changes shouldn’t be so brusque.”

Velarde said the sol’s recent losses were due to rampant speculation that would likely continue until the Federal Reserve raises interest rates. Afterward, “there should be no reason for the exchange rate to rise further,” he said.

“We think the market has gotten ahead of itself. I personally think it is very ahead of itself,” Velarde added.

Velarde’s comments follow the central bank’s announcement last week that it was considering raising the interest rate next month to counter currency-driven inflationary pressures.

Velarde said a rate hike in Peru was far from guaranteed.

“It’s going to depend on the data we see - August inflation, the pace of economic activity, impacts on inflation expectations,” he said.

Reporting By Teresa Cespedes, Writing by Mitra Taj; Editing by Alan Crosby

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