UPDATE 3-Peru cenbank: inflation in check despite growth

(Adds forecast from vice finance minister)

By Walter Brandimarte

NEW YORK, Aug 17 (BestGrowthStock) – Peru’s inflation outlook is still
“rather benign,” Central Bank President Julio Velarde said on
Tuesday, in a sign the bank will not aggressively raise interest
rates despite surging economic growth.

Speaking to investors in New York, Velarde said the bank will
soon revise its 2010 growth forecast upward from 6.6 percent, but
warned investors against excessive “euphoria” regarding the
country’s economy.

Peru’s economy surged 11.9 percent in June from the same month
a year ago, stoking expectations that aggressive monetary
tightening would be needed to keep inflation in check. For
details, see [ID:nN16264275]

Underscoring a bullish growth outlook, the country’s vice
finance minister said in Lima on Tuesday that economic expansion
in July could be a bit less than 12 percent.

Since the beginning of the year, the central bank has raised
its base interest rate four times to 2.5 percent. The first three
increases were of 25 basis points and the last one 50 basis
points.

Velarde said there are concerns about the impact of rising
prices of soft commodities, but forecast Peru’s inflation would
remain within the target range of 1 percent to 3 percent.

“Our scenario for inflation is rather benign,” he said during
a conference organized by the Peruvian-American Business Council.
“Of course we have already said we are going to withdraw this
monetary stimulus but the pace and the timing will be dependent on
the data.”

Velarde argued that Peru’s economic growth will likely slow to
less than 7 percent in the fourth quarter, reducing inflationary
pressures.

EXCESSIVE EUPHORIA

“If that happens, the pressure of growing over potential GDP
will not be so strong, and that would also limit the possibilities
of continued increasing interest rates,” he said.

Unlike other countries in Latin America, Peru can post high
growth rates with relatively little uptick in inflation because of
low tariffs and few prices that are linked to price indexes. In
2007, the economy grew around 9 percent, but inflation was less
than 4 percent.

Despite an expected slowdown in the fourth quarter, Peru
remains on track to be the fastest-growing Latin American economy
in 2010. With consumption and credit booming, analysts are also
boosting GDP growth estimates for the country.

JPMorgan, for example, plans to revise its 2010 growth
forecast for Peru to around 8 percent from the current estimate of
7.3 percent, the bank’s analyst Luis Oganes said at the same
conference.

“Still, I wouldn’t characterize that as overheating,” Oganes
said. “But there’s an output gap that will be closing this year.”

Velarde said the central bank will have to enforce “prudential
measures” if credit continues to grow at very strong levels and
warned investors against excessive euphoria.

“Peruvian investors more than foreign investors (are)
believing that the economy might continue growing more than 10
percent always,” he said.

“That’s a problem. If you want to see a recession, you’ll see
a previous boom with euphoria before.”

UPDATE 3-Peru cenbank: inflation in check despite growth