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Peru central banker does not rule out rate cut next year

Central Reserve Bank of Peru President Julio Velarde attends the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming August 28, 2015. REUTERS/Jonathan Crosby

By Teresa Cespedes and Mitra Taj

LIMA (Reuters) - Peru's central bank does not rule out lowering the benchmark interest rate if government reforms fail to revive domestic demand next year and inflation is low, the bank's president told Reuters on Tuesday.

Julio Velarde, a widely respected central banker recently appointed to a third five-year term by Peru's new president, Pedro Pablo Kuczynski, said pending government policies aimed at jumpstarting growth will not likely be felt until 2017.

"If government measures reactivate domestic demand, there'd be no reason" to lower the interest rate, Velarde said in an interview, adding "monetary policy is a crutch."

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Surging copper production has been driving economic growth in Peru this year, but non-primary sectors have slowed and private investments continue to slump.

Velarde said monetary policy is still "marginally expansive" after the bank held the interest rate steady at 4.25 percent for eight months. But the stimulus will fade as inflation cools to 2.8 percent or "maybe 2.9 percent" by year-end, before nearing the bank's goal of 2 percent in 2017.

Kuczynski's three-month old centrist government has promised to slash red tape to boost private investments while pushing out new infrastructure projects. He also plans to trim the value added tax rate while raising corporate taxes.

Business confidence has risen since Kuczynski, a former Wall Street banker, took office in late July, replacing a former military officer.

But Velarde said investors are eager to see the government start passing new laws after Congress gave Kuczynski legislative powers to implement his reforms last month.

"They're eager to sit down at the table. We'll have to see if what they're served is what they expect," Velarde said. "There's still uncertainty around the reforms."

The government's promise to trim the fiscal deficit could strain its bid to spur domestic demand with public spending.

Velarde said the economy will likely expand by less than 4 percent in the fourth quarter - assuming a massive copper mine resumes operations following protests that blocked key roads - compared with 4.7 percent in the same period in 2015.

But Velarde said he still expects a 4 percent expansion in all of 2016, up from 3.3 percent last year.

"The economy is growing; it doesn't need much monetary or fiscal fussing," Velarde said.

Velarde added that global markets would likely lurch if U.S. presidential hopeful Donald Trump won the Nov. 8 election, with stocks and commodities falling and the dollar and gold rising as safe havens.

(Reporting by Teresa Cespedes and Mitra Taj; Editing by David Gregorio and Lisa Shumaker)