Country Report Peru May 2000 Updater

Economic policy outlook: Monetary policy

The Banco Central de Reserva del Peru (the Central Bank) will continue to favour an increase in liquidity to help the financial system overcome the consequences of the squeeze suffered in 1998-99. Monetary growth, as measured by M1, was slow in the first quarter of 2000, and bank credit to the private sector contracted. The flight to quality by private banks is still in progress, and they will only start enlarging their client portfolios again -- gradually -- in 2001, when the recovery in domestic demand and the payments chain is fully consolidated, making credit conditions less risky. Although the banking system experienced a worsening in its bad debt ratios in January -- owing mostly to stricter accounting criteria and a seasonal fall in corporate borrowing -- the worst of the banking crisis is over.

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