The consumer price index for Lima fell 0.34% in June from the previous month, the government's statistics agency said Wednesday. On a 12-month basis, the CPI rose 3.06% through June, it added.

Economists expect the CPI to soon fall to within the central bank's annual target range of between 1.0% and 3.0%, allowing it to ease monetary policy with the aim of boosting economic growth.

"The significant moderation of inflation pressures, converging inflation expectations, well-anchored currency and gradual deceleration of domestic demand generate a rather constructive outlook for inflation going forward and this should prompt the central bank to continue to ease monetary policy," Goldman Sach's Alberto Ramos said.

The central bank's reference rate reached a recent high of 6.5% late last year, as increases in the costs of imported fuel and food products lifted consumer prices.

Since then, the reference rate has fallen to 3.0%, and another reduction is expected when the central bank's board of directors hold its regularly scheduled monthly meeting on July 9.

"We expect the central bank to ease monetary policy further next week; we forecast a 50-basis-point rate cut to 2.5%, but do not rule out a larger rate cut. We expect the current easing cycle to end with the policy rate at around 2.0%," Ramos said.

Central Bank President Julio Velarde said at a recent press conference that the central bank doesn't have a floor for the reference rate. The central bank board of directors have said they expect inflation to fall to within the target band in the third quarter.

Deutsche Bank economist Vicente Tuesta Reategui said they expect the central bank to cut the policy rate by 50 basis points to 2.5% in the meeting next week.

"We believe that, by reducing the size of the rate cut (100 basis points in the previous month), the central bank would signal that, even though the ongoing disinflation process suggests extra easing, the policy rate is approaching its equilibrium value. Indeed, historically, the central bank??s action tended to be asymmetric, with cuts more rapid than hikes; hence some cautiousness will guarantee long-term price stability," he said.

Deutsche Bank expects another 50-basis-point cut in August, and no interest rate increases until well into 2010.

"We expect a 50-basis-point cut at next week's monetary policy meeting, which in our view will mark the end of the monetary easing cycle," Credit Suisse said in a report.

Financial services company LarrainVial said in a report Wednesday that Peru's central bank could reduce the reference rate by another 150 basis points to 1.5% before September.

(END)INT/RMB