Ladies and gentlemen,

To me, everything is special about this event. Not least, that it takes place at the National Gallery, one of my favorite museums in London, and indeed in the world. Most significant of all, naturally, is that our host, one of the best sources of news and analysis about the emerging world, has chosen such a grand venue for its “Central Bank of the Year” award ceremony. The Central Bank of Peru is honored to have been singled out for such distinction in Latin America. I would like to think of it as a renewed recognition of Peru’s two-decade progress towards macroeconomic soundness, price stability,  high growth, and institutional strength. Peru’s new place as one of the world’s most dynamic emerging economies owes much to Peruvians’ willingness to learn from the past and give strong political support to responsible policies. In particular, since the 1990s, monetary discipline has mustered growing social consensus, and is widely viewed by the population as pivotal for stability, growth, and equity. I am proud to say that the Central Reserve Bank of Peru has done its job not only by contributing to the foundations of sustained growth, but by acting in a timely manner to ensure business  continuity in the face of sudden disruptions. This ability was put to the test especially during the current global crisis.

The impact of the global financial crisis on developed economies has been studied extensively since it started two years ago: widespread uncertainty persists in financial markets; the spillovers on the real economy have left behind a trail of sluggish growth and stubborn unemployment; and fiscal  sustainability is a source of serious concern. Although economic recovery appears to be taking hold gradually in the industrial world, reduced income and wealth continue to keep consumption and investment down. However, unlike in previous global crises, this time Latin America has been much less affected. After a slowdown in 2009, Latin America’s economies have bounced back. Mainly, the worst turmoil to shake the world since the Great Depression found Latin American countries with strong fiscal and reserve buffers, which enabled them to use counter-cyclical policies for the first time. Regarding  Peru’s monetary response, the leverage and credibility built patiently by the Central Bank, together with a mix of bold policies and fortunate timing,  protected the financial system, and thereby the real sector, from a major crunch. Among the favorable signs of Peru’s renewed takeoff, growth in 2010 is now forecasted at 8 percent, amid resilient support from investors and consumers, and its growth prospects are again among the highest in the region.

What was Peru’s strategy on the monetary front? Mainly, at the onset of the global financial crisis, the Central Bank Board decided to deploy heavy artillery in the form of a vast range of monetary tools geared to ensure adequate liquidity and credit in the domestic financial system, including, in  particular, a set of non-conventional policies such as extending the  maturities of Central Bank papers, reducing reserve requirements,  repurchasing securities, and providing sufficient dollar liquidity through  foreign exchange sales and exchange rate-indexed certificates of deposit amounting to one-third of foreign official reserves. The tactic was to keep the financial system running and wait for the panic to subside.

It was only then that the Central Bank started to provide monetary stimulus by bringing its policy interest rate to historic lows. As we have argued  several times before, with decreasing global uncertainty, interest rate reductions no longer exacerbated capital account risks. And with a stabilized  financial sector and the transmission mechanism intact, policy rate cuts  translated swiftly into lower short- and medium-term market interest rates.  As bank and capital market funding became available to firms at a lower cost, the economy rapidly resumed growth. Contrary to other economies, credit to the private sector never contracted in Peru. In sum, monetary policy  preserved financial liquidity, prevented spillovers to the real sector, and kept credit flowing to businesses and consumers. In this context, the  economy still grew in the fourth quarter of 2008, and Peru was one of the few countries in the world that did not experience negative growth in 2009.

In view that the international environment is now supportive and domestic  momentum is strong, since May 2010 the Central Bank started to withdraw monetary stimulus to keep inflation within target. Going forward, however, we cannot afford to be complacent. Especially, the Central Bank will need to  remain vigilant in the coming years to fend off the considerable risks that still weigh on the markets in the wake of the global crisis. At the same time, we are confident that our reflexes will remain sharp. And I am sure this will be so thanks to an element that I have chosen to mention last but not least: in closing, I would like to emphasize that, more than a personal honor, in my mind this award is a recognition to the members of the staff of the Central Reserve Bank of Peru, who have been at the center of Peru’s good economic performance in recent years. Their professionalism, efficiency, and sense of responsibility underscore the key role of human capital in growth and development. Long after my tenure as Governor comes to an end, the Central Bank’s institutional strengths will continue to ensure compliance with its core mandate to preserve price stability.

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