December 16, 2016 / 7:12 PM / 2 years ago

UPDATE 1-Peru central bank raises 2016, 2017 inflation outlook on drought

* Food prices expected to ease in coming months

* Growth forecast for 2017 trimmed to 4.3 pct from 4.5 pct

* Public investments must recover to support economic growth (Adds central bank forecasts for inflation, quotes from bank president)

By Ursula Scollo and Teresa Cespedes

LIMA, Dec 16 (Reuters) - Peru’s central bank raised its 2016 inflation outlook to 3.3 percent from 3.0 percent on Friday, citing a drought-induced spike in food prices that could delay its goal of bringing inflation to 2.0 percent by as much as a year.

The central bank had expected inflation to slow to 3.0 percent in 2016 before cooling to 2.0 percent in 2017 in its last quarterly report in September.

But higher food prices as a drought grips rice and potato farming regions prompted the bank to raise its 2017 inflation forecast to 2.3 percent, which would mark the first year that inflation falls within its 1-3 percent target range since 2013.

“We’re worried that it could impact expectations for inflation,” Central Bank President Julio Velarde said of the drought during a presentation of the central bank’s report. “We expect a correction” of food prices in coming months, he added.

Velarde said it was too early to gauge the longer-term impacts of the drought as rains could fall soon.

The central bank left the interest rate unchanged at 4.25 percent for the tenth month in a row on Thursday, but noted that the drought was fanning inflation and that construction and manufacturing had been hit by a lack of investment.

The central bank trimmed its view for 2017 growth to 4.3 percent from 4.5 percent but maintained its forecasts for a 4 percent expansion this year and 4.2 percent in 2018.

Velarde said the sharp drop in public investments in the fourth quarter needs to be reversed to help the economy grow by its potential pace of 4 percent.

In all of 2016, public investment would likely grow only about 0.1 percent, Velarde said, adding that he expected a recovery to 7.4 percent next year.

Peruvian President Pedro Pablo Kuczynski, a former investment banker who took office July 28, promised to revive slackening domestic demand with an infrastructure boom that would bring sorely needed public works to far-flung corners of Peru.

But a sharp drop in infrastructure spending by the central government in October prompted the steepest contraction in construction activity in 12 years, putting a drag on the mining-fueled economic recovery.

Earlier on Friday the finance minister said the drop in public investments was due to a transition toward a bigger role for the private sector in public works.

The economy likely grew 3.2 percent in the fourth quarter and would grow likely expand 4.2 percent in the first quarter, Velarde said.

Reporting By Ursula Scollo and Teresa Cespedes, Writing by Mitra Taj; Editing by Dan Grebler

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