(Recasts with central bank chief's decision not to take pay increase)
By Marco Aquino and Mitra Taj
LIMA, Nov 5 (Reuters) - The head of Peru's central bank decided not to take a pay raise, aiming to diffuse tension with the government after President Ollanta Humala criticized his 6 percent hike in a rare public rebuke.
The central bank said on Wednesday that its president, Julio Velarde, would not accept the salary increase his board recently granted all bank employees after two years of flat wages.
Humala, a former left-leaning military officer who turned to the right after assuming office in 2011, scolded Velarde for the pay hike because he was already the highest-paid public official in Peru.
The raise would have boosted Velarde's salary to 617,344 soles ($210,913), nearly triple Humala's 224,000 soles ($76,528) per year.
In a letter to Velarde made public by local media, Humala urged Velarde to reject the raise to preserve the bank's image.
The central bank defended the pay increase as reasonable and said Velarde's decision was personal and did not erode the institution's autonomy.
"What is most important in current circumstances is to work toward a solution to economic problems, avoiding fruitless arguments," the bank said in a statement.
The spat comes amid the worst economic slowdown in the Andean country in five years and follows the government's criticism in April of the central bank over currency policy.
Velarde, a widely respected central banker, has led Peru's monetary authority since 2006.
Humala's decision to reappoint Velarde in 2011 was praised by investors who feared the new leader would veer away from orthodox economic policies.
Peru's inflation rate is one of the lowest in Latin America, running slightly above the central bank's 3 percent target ceiling. But economic growth has been hit this year by a drop in mineral exports and is now on track to grow by 3 percent in all of 2014 - about half initial government and central bank estimates.
Velarde has said in recent months that a strong economic rebound next year will only be possible if the government cuts red tape holding up investment and mining projects.
Earlier this year, Humala's government faced a wave of criticism for nearly doubling the salaries of his ministers.
Peru's minimum monthly salary is 750 soles ($256).
The central bank is constitutionally autonomous. Three of its board members are appointed by Congress and another three by the executive branch. The bank president is appointed by the president and ratified by Congress.
$1=2.927 soles Reporting By Marco Aquino and Mitra Taj; Editing by W Simon and Dan Grebler