By Teresa Cespedes and Ursula Scollo
LIMA, March 24 (Reuters) - Peru’s central bank vowed on Friday to do its part to help mitigate flooding and a massive graft scandal that it expects will trigger the first economic slowdown in three years.
The economy will likely grow 3.5 percent instead of 4.3 percent this year and 4.1 percent instead of 4.2 percent in 2018, the central bank said in its quarterly report, slashing its December forecasts.
The need to rebuild parts of Peru that have been hit hard by destructive rains and flooding caused by a surprise local El Nino phenomenon will likely force the government to post a bigger-than-expected fiscal deficit of 2.8 percent of gross domestic product this year, the bank said.
Central Bank President Julio Velarde told a news conference the benchmark interest rate might be lowered if domestic demand does not improve, depending on inflation.
Despite the extreme weather that has blocked transit and squeezed some food prices, the bank only slightly raised its view for inflation this year, to 2.4 percent from 2.3 percent.
However, Velarde warned inflation in March was going to be “extremely high.”
The bank has not cut the benchmark interest rate since January 2015 after slumping prices for Peru’s mineral exports prompted a sharp economic slowdown.
Velarde said the bank will lower reserve requirements for deposits in soles to 5 percent from 6 percent - a measure that should inject some $154 million into the economy.
“This year we’re going to be hit by El Nino and the postponement of large projects,” Velarde said during a presentation of a quarterly inflation report. “Rest assured that the central bank will do its part to try to mitigate the impacts.”
Peru has enjoyed one of the most robust economies in Latin American, but a surge in copper production that has driven growth is expected to fade this year.
Much will hinge on domestic demand rebounding from nearly flat growth last year, possibly with the help of extra stimulus funds promised by President Pedro Pablo Kuczynski.
Some have forecast an even sharper slowdown as the El Nino is forecast to stretch into April, battering agriculture, fishing and manufacturing. Pedro Tuesta, an analyst for 4Cast, said he now sees a 2.8 percent expansion this year.
Reporting By Teresa Cespedes and Ursula Scollo, Writing By Mitra Taj; Editing by Alistair Bell and Cynthia Osterman