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UPDATE 1-Peru's central bank surprises by holding key rate steady
August 8, 2014 / 12:25 AM / 3 years ago

UPDATE 1-Peru's central bank surprises by holding key rate steady

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LIMA, Aug 7 (Reuters) - Peru’s central bank on Thursday held the benchmark interest rate steady at 3.75 percent but said it will soon loosen reserve rules, despite expectations it would opt for a second straight monthly rate reduction to counter sluggish economic growth.

Eight of 13 economists polled by Reuters this week said they thought the bank would lower the key rate to 3.50 percent this month, after a second quarter that likely marked the weakest economic expansion in five years.

In its statement, the bank noted stubbornly high inflation this year and recent signs that the U.S. economy is recovering.

“Supply factors that elevated inflation are moderating at a slower rate than expected,” the bank said in a statement.

The annual inflation rate eased slightly to 3.33 percent in July - remaining just above the ceiling of the central bank’s 1-3 percent target range, as it has all year.

Earlier on Thursday, Central Bank President Julio Velarde said annual inflation would likely cool to under or around 3 percent in August, and that economic growth probably started to accelerate after June.

He said that June’s year-on-year expansion was probably “very, very bad.” The official growth rate in June is scheduled for release on Aug. 15.

“We’re seeing that the lowest point for economic activity has apparently been June,” Velarde told reporters on the sidelines of an event. “We expect the third quarter to be better than the second quarter.”

The economy grew 2 percent in April and 1.84 percent in May on the year - the slowest expansions since 2009 when Peru was still recovering from the global financial crisis.

Before the financial crisis, the global minerals exporter had not posted such weak monthly expansions in a decade.

The central bank, which surprised the market last month by cutting the interest rate for the first time since November, now sees the potential growth rate at 5.00 percent.

Velarde has said in the past that he prefers to lower reserve requirements to cutting the interest rate as a way of stimulating growth.

The central bank on Thursday said it would lower reserve requirements on deposits in soles to 11 percent from 11.5 percent starting next month, part of its bid to boost lending in the local currency.

“That is like a backdoor rate cut,” said 4Cast analyst Pedro Tuesta. “We may not see further cuts and only reserve requirement cuts for a while.”

Peru posted a 3.57 percent expansion in the first five months of 2014 from the same period a year ago. Last year the economy grew 5.8 percent.

In July the central bank cut its 2014 growth outlook to 4.4 percent from its previous forecast of 5.5 percent. (Reporting By Lima Newsroom; Editing by Ken Wills)

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