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Peru Central Bank Chief Sees Stronger Economy in Second Half

Peru Central Bank Chief Sees Stronger Economy in Second Half

Posted by Juan Gavasa on July 10, 2014

Peru's economy is expected to rebound strongly in the second half, thanks largely to higher mining production and investments in new infrastructure projects, the president of the country's central bank said Wednesday.

Central Reserve Bank of Peru President Julio Velarde said in an interview that the ramping up of production at the Chinese-owned Chinalco'sToromocho copper mine, which began operations late last year, will support the economy. He also cited large infrastructure projects, such as a $5.6 billion metro project in Lima and a $4 billion gas pipeline project in southern Peru. The government recently awarded the concessions for both projects.

"The recovery is going to be stronger in the second half of the year," Mr. Velarde said. "We are going to start to notice the investments towards the end of the third quarter and in the fourth quarter."

These projects will help to lift economic growth to about 6% next year and almost 7% in 2016, he said.

The central bank is projecting growth of 5.5% in 2014, but Mr. Velarde hinted that the monetary authority may lower that forecast owing to sluggish growth in the second quarter.

"The figure in April was less than we expected when we did the projection, so with this factor there should be a correction," said Mr. Velarde, who added that growth in May and June is also expected to be weak.

"I don't see the second quarter as being very positive," he said.

A central bank survey of 20 economic analysts released last week found that Peru's economy is expected to grow 5% in 2014.

The central bank will release its updated growth forecast in its next quarterly inflation report due on July 18.

In April, Peru's gross domestic product expanded by 2% compared with a year earlier, the lowest monthly increase since 2009.

The slowdown in the economy was owing to lower-than-expected production at one of Peru's biggest mines, as well as a decline in agriculture and fishing output, Mr. Velarde said.

He added that weak mineral prices continue to weigh on the mining-heavy economy, which has led to a decrease in exports and a reduction in expenditures by mining companies.

Exports have fallen 11.9% in the first five months of this year to almost $15 billion as a result of a decline in the country's traditional commodity exports, according to figures from the central bank.

The lower growth has led some private-sector economists to suggest that the central bank should provide stimulus by lowering its reference interest rate. The last time the central bank reduced the rate was in November, lowering it a quarter point to 4.0% from 4.25%.

The central bank has in recent months instead opted to reduce commercial bank reserve requirements to stimulate loan growth.

"We have been lowering the reserve requirements since April last year, so you could say that the policy has been moderately expansive," he said.

Mr. Velarde declined to say how the central bank's board of directors may act at its monthly meeting Thursday to decide on holding or changing the reference rate.

Mr. Velarde added that Peru's 12-month inflation is expected to converge back toward the central bank's target range by the end of the year. Peru's annual inflation stood at 3.45% at the end of June, above the target range of 1% to 3%.

"Our projection is that total inflation, which is now at 3.4%, will be below 3% before the end of the year and at 2% next year," Mr. Velarde said.

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