Central Bank Says Growth Likely to be Lower than Previously Expected

Peru’s Central Bank said that the country’s economy could grow even slower than projected, which led it to reduce its reference interest rate this week.

On Thursday, the central bank’s board of directors cut the policy rate by 25 basis points to 4.0% from 4.25%. The reduction was the first policy rate move since May of 2011 and the first time the central bank cut the rate in more than four years.

The reduction wasn’t expected by market analysts, who had thought the monetary authority would keep its rate on hold for the remainder of this year and into 2014.

The second largest bank in Peru, BBVA Banco Continental, said the rate cute has created uncertainty about its future policy decisions. “The uncertainty about the path that the policy rate will follow has increased, given the sudden change in the [central bank] perception on the state of the economic cycle and the expected rebound of activity since the last quarter of the year,” it said.

Economists had expected the central bank to remain on hold in large part because authorities at the bank had said they expected a strong recovery in economic activity in the final quarter of 2013. That outlook, which has been shared by many private sector economists, was based on the startup of new mines and perception that the global economy was improving.

However in its statement on Thursday, the central bank said that the decision to reduce the rate was partially due to weak growth. On Friday, central bank chief economist Adrian Armas acknowledged that Peru’s economy may not grow as strong as the central bank had expected.

Along with other economists, the central bank has lowered its forecast for Peru’s 2013 GDP growth several times. Its latest forecast pointed to growth of 5.5 percent.

Armas said that growth may actually be closer to 5.2 percent or 5.3 percent this year. That outlook is in line with forecasts from private sector analysts polled by the central bank.

“The information that we have is that GDP growth is going to be around what we are receiving from the surveys,” Armas said, according to daily El Comercio.

Peru’s economy expanded 6.3 percent in 2012. In the January to August period, it has grown 4.9 percent.

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