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UPDATE 2-Peru central bank doesn't rule out rate cut, slashes growth view
September 20, 2013 / 4:15 PM / 4 years ago

UPDATE 2-Peru central bank doesn't rule out rate cut, slashes growth view

LIMA, Sept 20 (Reuters) - Peru’s central bank said on Friday it has not ruled out eventually lowering its benchmark interest rate, and slashed its estimate for 2013 economic growth to 5.5 percent, below the economy’s potential growth rate.

Last year the economy expanded 6.3 percent, one of the fastest rates in the region, but this year growth has slowed more than expected because of weaker mineral exports and slightly tamer domestic demand.

Central Bank President Julio Velarde said that the bank has not ruled out cutting the benchmark rate, which it has held steady at 4.25 percent for 28 months in a row.

“We do not rule out lowering the interest rate in the future but that is part of the analysis that we are doing ... we do not rule it out at all,” Velarde said at a press conference, adding that the bank was not “dovish.”

“One fear three to four weeks ago about lowering the interest rate was that it could hurt the exchange rate but that fear has dissipated for Peru,” Velarde said.

The U.S. Federal Reserve’s decision this week to continue stimulus measures favored the sol currency, which had slipped more than 9 percent this year on expectations of a winding down of the Fed’s $85 billion per month of bond buying.

“But we still have somewhat high inflation and we are going to talk about that in the second week of October,” Velarde said in reference to the central bank’s meeting on the interest rate on Oct. 10.

Annual inflation, now 3.28 percent, will likely cool to 2.9 percent by the end of 2013, just under the upper limit of the central bank’s 1 to 3 percent target range, Velarde said.

Velarde said the bank might also further loosen reserve requirements on banks to encourage lending, as it has several times in past months.

The central bank’s new estimate for this year’s economic expansion, included in a quarterly report published on Friday, matches the 5.5 percent consensus forecast of private analysts polled by the bank in August.

The bank said in its last report, in June, that the economy would probably grow 6.1 percent this year.

In the first seven months of 2013 the economy grew by 5 percent.

Peru’s potential growth rate, at which it can expand without stoking inflation too much, is seen by the central bank and private economists as being around 6 to 6.5 percent.

The bank now sees growth next year at 6.2 percent, down from its earlier view of 6.3 percent, according to its report.

The value of the Andean country’s mineral shipments - which make up about 60 percent of overall export earnings - have tumbled more than expected this year on softer demand from big buyers like China and lower international metal prices.

The central bank slashed its official view of this year’s trade balance to a $666 million deficit from its previous forecast of a $675 million surplus.

Last year Peru posted a $4.5 billion trade surplus, which was half the size of the surplus in 2011. This year’s expected trade gap will be the first since 2001.

Next year the central bank expects a trade surplus of $310 million, instead of the $68 million surplus it forecast in its last quarterly report in June.

The central bank also trimmed its view for this year’s fiscal surplus to 0.4 percent of gross domestic product, from its June estimate of 0.7 percent. The bank now also sees a smaller fiscal surplus in 2014, at 0.1 percent of GDP instead of the 0.6 percent estimated in June.

The central bank said the current account deficit will likely be wider this year, at 4.9 percent of GDP instead of 4.4 percent, but it left unchanged its forecast for a current account deficit equal to 4.6 percent of GDP in 2014.

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