Peru holds rate, sees slight recovery in external market

    Peru's central bank held its policy reference rate steady at 4.25 percent, citing economic growth that is close to the country's potential growth rate, inflationary expectations that are within the target range, a reversal of supply factors that pushed up inflation and uncertain international financial conditions despite a recovery in recent indicators of global activity.
    The Central Bank of Peru (BCRP), which has held rates steady since April 2011, also said it expects inflation to remain within the bank's target range in the following months due to better food supply and inflation expectations that are in the bank's target range of 1.0 to 3.0 percent.
    Peru's inflation rate eased to 2.83 percent in September from 3.28 percent in August after also exceeding the bank's upper limit in July.
    Current and advanced indicators show that Peru's economy is close to its long-term sustainable level of growth while indicators associated with the external market have shown a slight recovery and this has had a favourable impact on export prices, the central bank said.

    This assessment of the external market is more optimistic than in recent months when the central bank characterised the external market as weak, with the associated impact on export prices.
    In August the central bank lowered its growth forecast for this year to between 5.5 percent and 6.0 percent from an earlier forecast of 6.1 percent. The 2014 forecast was cut to 5.9 percent from 6.3 percent. Last year Peru's economy expanded by 6.3 percent.
    In the second quarter, Peru's Gross Domestic Product expanded by 1.1 percent from the first quarter for annual growth of 5.6 percent, up from 4.6 percent.
    Since April Peru's central bank has been adjusting its reserve requirements to provide more credit to the financial system in the domestic sol currency and the bank repeated that "should it be necessary, the board will adopt additional measures to make the regime of required reserves more flexible."
    In October the mean maximum rate of reserve requirements in the sol was lowered to 16 percent from 17 percent and the marginal rate was lowered to 16 percent from 20 percent.
    In addition, the central bank has also established additional reserve requirements based on credit issued in foreign currencies to encourage the "dedollarization of loans," the bank said.
    The requirements will be applied if a bank's balance of loans in U.S. dollars in the domestic market exceeds five percent as of September.

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