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Easing inflation offers Peru more monetary policy room-central bank
September 4, 2014 / 4:12 PM / 3 years ago

Easing inflation offers Peru more monetary policy room-central bank

LONDON, Sept 3 (Reuters) - Peru's economic growth pace may slow to 4 percent in 2014, less than previously expected, but easing inflation is offering room to ease monetary policy, central bank governor Julio Velarde said in an interview.

Speaking to Reuters and Reuters Television on the sidelines of an investment conference in London on Thursday, Velarde said: "What we are seeing gives us more room for expansionary monetary policies ... if inflation is negative it gives us more room."

Velarde was referring to recent data that showed inflation had unexpectedly shrunk by 0.09 percent in August, bringing the annual rate back into the central bank's 1-3 percent target band for the first time this year.

Velarde predicted inflation would come in at 2.8 percent this year and slow further next year.

"We have some space because our projection for inflation is that it will continue being lower month after month. We expect it to finish (at) 2 percent next year," he added.

The central bank surprised markets last month by not cutting interest rates from 3.75 percent.

Peru's economic growth has slowed to five-year lows, hit by a fall in metals prices driven by lower demand from China. The economy grew 3.3 percent in the first half of 2014 versus a year earlier, and GDP grew 0.3 percent in June.

Velarde said he saw the June number as marking the low point but he forecast 2014 full-year growth to be 4 percent, lower than the official central bank forecast from July of 4.4 percent. He stuck to a prediction of 6 percent for next year.

"We are talking of 4 percent. In the third quarter, we expect 3.7 percent (growth) and 5.2 percent in the fourth quarter and why in Q4 the big increase? It is because of a recovery of investment which had been declining ... Lots of new (mining) projects happened during the time of high (copper and gold) prices and those will now come forward," he said.

The slowdown has taken a toll on Peru's sol currency which recently plumbed four-year lows against the dollar. The sol, like most emerging currencies, has also been hurt by dollar strength, caused by the U.S. Federal Reserve's moves towards ending its bond-buying programme.

Velarde however, indicated he was not worried about the currency, adding: "We are close to fundamentals." (Reporting by Sujata Rao and Chris Vellacott; Editing by Ruth Pitchford)

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