January 12, 2018 / 12:36 AM / a year ago

UPDATE 1-Peru central bank cuts interest rate to 3 pct as widely expected

(Adds comments from central bank and analyst, context)

LIMA, Jan 11 (Reuters) - Peru’s central bank lowered the benchmark interest rate to 3 percent as widely expected on Thursday, citing disappointing government spending in the fourth quarter and weak economic growth that was starting to dampen inflation.

The decision follows a sharp drop in business expectations for growth following a political crisis that nearly toppled President Pedro Pablo Kuczynski last month.

Eight out of nine analysts polled by Reuters had forecast the 25-basis-point reduction to the key rate, with one forecasting a hold at 3.25 percent.

Inflation slowed to 1.36 percent in December, in the lower end of the central bank’s 1-3 percent target range for the second month in a row.

“This result is mainly explained by the reversal of supply shocks, to which below-potential economic growth is added,” the bank said in a statement. “Inflation will continue to decline in the first months of 2018, and later converge to 2 percent.”

The central bank said weaker-than-expected public spending in the fourth quarter had widened the gap between the economy’s growth rate and its potential.

Pedro Tuesta, chief Latin American analyst for 4Cast, said the bank was signaling it expects economic growth to weaken further. “The position is very expansive,” said Tuesta.

Last month, Kuczynski narrowly survived an impeachment bid in the wake of a graft scandal and triggered protests and political resignations days later by pardoning former authoritarian president Alberto Fujimori.

Last week, Finance Minister Claudia Cooper warned the political crisis was not over yet, but said it should not have any major impact on the economy as long as it was resolved in a “civilized way.”

Cooper said public investments were suspended for two weeks due to the political turmoil last month, but have since resumed.

Earlier on Thursday, the bank published a monthly poll of business expectations that showed a nearly 10-point drop in positive sentiment about the economy in three months. (Reporting By Lima Newsroom; Editing by Chris Reese)

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