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By Richard Lough
BUENOS AIRES, March 13 (Reuters) - Peru’s central bank chief said on Friday that concerns about the local currency’s slide against the dollar kept the monetary authority from lowering the benchmark interest rate to boost the flagging economy.
The central bank weighed cutting the key rate on Thursday, President Julio Velarde said, after inflation eased under its target ceiling and a poll of business and consumer sentiment signaled a slower economic recovery than expected.
“We were discussing it,” Velarde told Reuters when asked how close the bank was to cutting the interest rate. “The problem is that a little under 40 percent of loans are in dollars.”
The relatively high level of dollarized debt in Peru could spell trouble as the sol currency weakens and the cost of paying it off goes up.
“We’re looking to what happens with the exchange rate and what happens to economic activity,” Velarde said.
Peru’s mining-fueled economy expanded by 1.7 percent in January on the year, Velarde said - slightly under the 2.1 percent figure forecast in a Reuters poll.
The central bank has sold $2.79 billion in the local spot market since the start of 2015 as the sol has slipped 4 percent amid expectations of interest rate hikes in the U.S. mid-year.
A rate cut in Peru would likely further sink the sol by reducing investor yields.
Velarde said the government was in a solid fiscal position to boost spending this year and help put economic growth hit by lower mineral prices back on track.
Peru is a top global producer of copper, gold and silver.
Peru’s President Ollanta Humala has cut taxes, loosened environmental rules and introduced measures to cut red tape over the past year in a bid to boost private investments.
Velarde said the government was working to bolster public investments, which fell 3 percent in 2014 from the previous year.
“But it’s not so easy, you move the lever and it doesn’t always answer,” Velarde said.
The economy expanded by 1 percent in the fourth quarter, well below the 5 percent pace that the central bank views as Peru’s potential growth rate.
Growth should pick up in the first quarter but the rebound will be “slow” because of a drop in public investment by local governments, another central bank official said on Friday. (Reporting By Richard Lough, Writing by Mitra Taj; Editing by David Gregorio)