LIMA, Dec 16 (Reuters) - Peru’s central bank will limit currency derivatives and further curb lending in dollars in a bid to carve out more room for monetary expansion as Peru’s currency slides to new five-year lows, the bank’s chief said on Tuesday.
Central Bank President Julio Velarde said that volatility in the local spot market has kept the central bank from cutting the benchmark interest rate to spur economic growth.
“If the exchange rate had been stable, we would have lowered the interest rate last week,” Velarde told reporters. “That fine line between what happens in the currency market and the interest rate is something that is driving (our) future actions.”
A lower interest rate would further boost demand for dollars.
The sol has already weakened more than 6 percent this year against the dollar and closed at its lowest level in more than five years on Tuesday. The central bank has sold nearly $4 billion in the local spot market to limit the dollar’s gains this year.
Velarde did not detail the new policies, saying the bank would announce them in coming weeks. But he said derivative trading that has fueled currency swings will be restricted.
“That precisely will give us more margin for monetary policy,” Velarde said. “Currency pressure in the second half of the year has been driven more by derivatives than by flows.”
The central bank has already stopped the expansion of credits in dollars by steadily lowering reserve requirements for accounts in soles over the past year, Velarde said.
“What we want to control now is a gradual decrease” in dollarized credit, Velarde said.
About 40 percent of debt in Peru is held in dollars - down from 70 percent a decade ago, according to the central bank.
Velarde said that he expects volatility in currency markets to continue next year.
The central bank has cut the benchmark interest rate twice this year to encourage economic activity that has slowed to its weakest pace in five years. (Reporting By Teresa Cespedes, Writing by Mitra Taj; Editing by Chizu Nomiyama)