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Peru’s central bank hiked its benchmark lending rate a quarter point on Thursday amid a strong economic recovery and solid domestic demand.

The hike to 1.75 per cent was in line with market expectations, following last month’s surprise quarter point increase from a record low of 1.25 per cent.

Given GDP growth forecasts ranging from 4.9 per cent to 7 per cent, policymakers are mindful of the dangers of overheating, but the increase leaves enough wiggle room to continue the normalisation of monetary policy and maintain the reference rate below neutral levels while uncertainty over Europe’s fiscal woes dissipates, according to Barclays Capital Research.

“An additional 25bp rise to 1.75 per cent will not entail a significant change in the central bank’s monetary policy stance, but will send a positive signal regarding its commitment to be ‘ahead of the curve’ in controlling inflationary risks,” Barclays analysts said.

Julio Velarde, Peru’s central bank chief, told a conference this week he believed the economy was not overheating despite growth of 8.8 per cent in March, compared with March 2009, and expectations that growth for April would also top 8 per cent.

“As we have mentioned in our last monetary policy meeting . . . the [central bank] will stay alert to any inflationary pressures from demand,” said Mr Velarde.