February 12, 2016 / 7:31 PM / 2 years ago

UPDATE 2-Peru central bank says inflation to take longer to cool

(Adds comments by central bank economist, background on economy)

LIMA, Feb 12 (Reuters) - Peru’s central bank said on Friday that it now expects inflation to take longer to cool back to its target level and described a more positive growth outlook, with a projected year-on-year expansion of nearly 4 percent in the first quarter.

The annual inflation rate, now at a four-year high of 4.6 percent, will likely reach its 3 percent target ceiling between the end of this year and the start of 2017 instead of by year-end as previously forecast, said the central bank’s chief economist, Adrian Armas.

However, the rise in consumer prices this month will likely be under January’s 0.37 percent increase and the annual inflation rate could start to slow in the second quarter if factors such as unusual weather subside, Armas said.

“We’re watching El Nino and how it might affect food prices in coming months,” he told reporters on a conference call. “We should be able to see a slowing trend more clearly in the second quarter.”

The central bank has raised the interest rate by 1 percentage point since September and warned after its third consecutive hike on Thursday that rising inflation expectations threatened to trigger a feedback loop of quickening prices.

Armas said that despite the bank’s recent tightening, the real interest rate has remained virtually unchanged in recent months - suggesting the central bank still has room to hike.

Some analysts expect the central bank to raise the benchmark interest rate several times in coming months as the sol currency’s depreciation continues to fan inflation and growth accelerates.

The sol slipped to a nearly 13-year low against the dollar this week amid ongoing worries about China, a major buyer of Peru’s key mineral exports.

Year-on-year economic growth will likely approach its potential rate of 4 percent in the first quarter after a likely pace of at least 5 percent in December, Armas said.

Soaring copper production thanks to new mining projects has given Peru’s stalled recovery a boost in recent months, even as domestic demand remains weak. Growth is expected to speed up this year as the huge copper mine Las Bambas starts operations.

Armas said the growth rate last year will likely come in above the central bank’s previous forecast of 2.9 percent. But it is still too early to revise upward its estimate for a 4 percent expansion this year, he said.

Growth data for December is scheduled for release Monday.

Reporting by Mitra Taj and Marco Aquino; Editing by Diane Craft and Matthew Lewis

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