(Reuters) - High commodities prices could hobble the global economy and uncertain times require extra caution when it comes to setting monetary policy, Peru's central bank chief said on Friday.
Julio Velarde, who spoke during the Reuters Latin American Investment Summit, said he was not surprised that Peruvian inflation in March sped up to 0.7 percent, the highest monthly level in nearly three years. Economists had forecast a rise on Friday of barely 0.5 percent.
Velarde gave no indication the bank would raise the benchmark interest rate more aggressively in coming months after lifting it three times this year to a current 3.75 percent to tame inflation.
He said sharp hikes during unpredictable times are "like putting on the brakes on an icy road" and that maintaining economic stability was crucial as presidential elections approach.
He stressed that the central bank has raised deposit reserve requirements for lenders three times this year, most recently on Thursday. The combined impact of those moves has put the country's effective benchmark interest rate at 4.75 percent, meaning monetary policy is no longer expansionary, he said.
"With the effect of the reserve deposit requirements we already have neutral rates," he said.
He did not rule out a more restrictive policy and economists expect the central bank to lift its benchmark interest rate to 4 percent next Thursday.
"What we try to avoid is secondary effects: the contamination of other prices," in which high global prices drive up local ones, he said.
Velarde said that despite the spike in prices in March annual inflation this year should end just about at 3 percent, the upper-end of the central bank's target range.
ELECTION AND INDEPENDENCE
He said Peru, like many emerging markets, is witnessing a supply shock from higher global prices for food and oil. Peru imports much of its grains, though a stabilization fund run by the government absorbs some oil hikes without passing them along to consumers.
"This is a supply shock at a complicated time for the central bank, first because domestic demand has been growing very strongly, and because the international situation has become a bit more complicated," he said.
Prolonged turmoil in the Middle East and a long period of even higher oil prices could hurt global growth and could prompt him to trim the central bank's projection for gross domestic product expansion this year of 7 percent.
"This is hurting consumer confidence, it's creating more clouds for the global outlook for growth," he said.
In 2010, Peru's GDP grew 8.8 percent, at one of the world's fastest rates.
Velarde said that the central bank is prepared to act if Peru's pending presidential election causes volatility in financial markets.
"In light of different scenarios, we are studying all possible responses to maintain, as much as possible, stability in the principal macroeconomic variables," he said.
Local markets stumbled this week as leftist ultranationalist Ollanta Humala became the front-runner before the April 10 vote. A run-off is expected on June 5.
On Monday, Humala, who has tried to moderate his tone to appeal to more voters, said he would respect the central bank's independence and honor Peru's large number of free-trade agreements.
Peru's central bank is regarded as one of the most independent in Latin America, though a bill stalled in Congress would give it even more insulation from politics by making sure the mandates of its directors don't end when new presidents take office.
"We have enjoyed a lot of autonomy. We've never received any pressure of any type (from the president)," Velarde said.
Source: www.reuters.com
Julio Velarde, who spoke during the Reuters Latin American Investment Summit, said he was not surprised that Peruvian inflation in March sped up to 0.7 percent, the highest monthly level in nearly three years. Economists had forecast a rise on Friday of barely 0.5 percent.
Velarde gave no indication the bank would raise the benchmark interest rate more aggressively in coming months after lifting it three times this year to a current 3.75 percent to tame inflation.
He said sharp hikes during unpredictable times are "like putting on the brakes on an icy road" and that maintaining economic stability was crucial as presidential elections approach.
He stressed that the central bank has raised deposit reserve requirements for lenders three times this year, most recently on Thursday. The combined impact of those moves has put the country's effective benchmark interest rate at 4.75 percent, meaning monetary policy is no longer expansionary, he said.
"With the effect of the reserve deposit requirements we already have neutral rates," he said.
He did not rule out a more restrictive policy and economists expect the central bank to lift its benchmark interest rate to 4 percent next Thursday.
"What we try to avoid is secondary effects: the contamination of other prices," in which high global prices drive up local ones, he said.
Velarde said that despite the spike in prices in March annual inflation this year should end just about at 3 percent, the upper-end of the central bank's target range.
ELECTION AND INDEPENDENCE
He said Peru, like many emerging markets, is witnessing a supply shock from higher global prices for food and oil. Peru imports much of its grains, though a stabilization fund run by the government absorbs some oil hikes without passing them along to consumers.
"This is a supply shock at a complicated time for the central bank, first because domestic demand has been growing very strongly, and because the international situation has become a bit more complicated," he said.
Prolonged turmoil in the Middle East and a long period of even higher oil prices could hurt global growth and could prompt him to trim the central bank's projection for gross domestic product expansion this year of 7 percent.
"This is hurting consumer confidence, it's creating more clouds for the global outlook for growth," he said.
In 2010, Peru's GDP grew 8.8 percent, at one of the world's fastest rates.
Velarde said that the central bank is prepared to act if Peru's pending presidential election causes volatility in financial markets.
"In light of different scenarios, we are studying all possible responses to maintain, as much as possible, stability in the principal macroeconomic variables," he said.
Local markets stumbled this week as leftist ultranationalist Ollanta Humala became the front-runner before the April 10 vote. A run-off is expected on June 5.
On Monday, Humala, who has tried to moderate his tone to appeal to more voters, said he would respect the central bank's independence and honor Peru's large number of free-trade agreements.
Peru's central bank is regarded as one of the most independent in Latin America, though a bill stalled in Congress would give it even more insulation from politics by making sure the mandates of its directors don't end when new presidents take office.
"We have enjoyed a lot of autonomy. We've never received any pressure of any type (from the president)," Velarde said.
Source: www.reuters.com
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