LIMA, May 30 (Reuters) - Peru's central bank chief said on Thursday that lowering interest rates would not grow the economy without first raising the potential growth rate, days after the economy minister asked him to be more proactive in bringing Peru out of a recession by cutting rates.
At an economic forum, central bank chief Julio Velarde said that for monetary policy to be effective, it is vital that Peru's potential growth rate increases.
The potential growth rate, the rate at which an economy can grow over the long term without causing inflation to rise, has now dropped to 2.5%, according to Velarde, mainly due to falling investment.
"If potential growth is not raised, the scope of countercyclical monetary policy is limited," Velarde said at an event organized by local newspaper El Comercio.
"It would be very easy to believe that you can grow (the economy) by lowering interest rates," he added, without referring to Economy Minister Jose Arista.
Arista said last week that the central bank's current benchmark interest rate of 5.75% is "quite high" and that "it does not help to reactivate the economy as fast as we would like."
Velarde highlighted that Peru's benchmark interest rate is the lowest among Latin America's largest economies.
"I have not had nor do I have any confrontation with the economy minister, nor do I intend to have it, and I find it really embarrassing even to be arguing with the minister," said Velarde.
Velarde said that reforms and stimulus to boost private investment were needed to improve the potential growth rate. He provided no details.
Peru, a top global copper producer and once among the region's strongest performing economies, entered a recession last year due to the El Nino weather phenomenon, lower private investment and lingering effects from anti-government protests.
"Now we are growing at (an average) pace of slightly above 1% in the last four years," Velarde said.
Peru's central bank and the economy ministry project the economy will grow 3.0% and 3.1%, respectively, this year. (Reporting by Marco Aquino; Editing by Leslie Adler)
