Bloomberg News

Peru May Raise Rate to 4.5% to Help Humala Check Inflation

June 09, 2011

June 9 (Bloomberg) -- Peru’s central bank will probably raise its benchmark lending rate for a sixth straight month to head off inflationary pressures four days after Ollanta Humala won the country’s presidential election.

The seven-member board will raise the benchmark rate by a quarter point to 4.50 percent, according to 13 of 17 economists surveyed by Bloomberg. Four economists forecast a pause. The board will announce its decision today at about 6 p.m. New York time.

Higher food costs pushed inflation outside the central bank’s target range of 1 percent to 3 percent for the first time since mid-2009 in April. While the annual rate slowed last month, a rate increase would show policy makers haven’t taken their eye off inflation in the heated aftermath of the former army lieutenant-colonel’s electoral victory June 5, Bank of America- Merrill Lynch said in a report this week.

“Investment is growing more slowly than it was, but it’s still growing,” said Carola Sandy, a Latin America economist at Credit Suisse Group AG. “It’s not obvious that the economy is slowing down enough. So far, the story that we’re getting from the Humala camp is relatively supportive of the economy.”

Finance Minister Ismael Benavides said in a June 7 interview that another rate increase isn’t necessary because inflationary pressures are receding as investors await “clear signals” from Humala on how he’ll manage the economy.

Humala Cabinet, Policies

Peru’s benchmark stock index plunged a record 12 percent on June 6 on concern the president-elect might make good on campaign pledges to increase government control of the economy and unilaterally boost mining royalties. In trading on June 7, stocks, bonds, and Peru’s sol currency rebounded as investors took advantage of the selloff.

Humala, leader of Peru’s Nationalist party, shifted his stance during the campaign to defending policies that made Peru the fastest growing Latin American economy over the past decade and distanced himself from his one-time ally, Venezuelan leader Hugo Chavez.

In an interview with CNN’s Spanish-language channel on June 7, Humala said he is considering asking central bank President Julio Velarde to remain in his post once his five-year term expires.

The new government is committed to maintaining existing macroeconomic, monetary and fiscal policies, said former central bank President Oscar Dancourt, an advisor to Humala who Bank of America said may be a candidate to take over at the central bank.

Still investors remain wary of Humala, whose original government platform called for changing the constitution to give the state a stronger role in the economy, including its ports and pension fund system.

Growth, Investment, Prices

Peru is in the midst of an “unsustainably strong expansion” Morgan Stanley economists Gray Newman and Daniel Volberg wrote in a June 6 report. Economic indicators including electricity output, which rose 7.2 percent in April, show domestic demand still risks fuelling inflation.

Peru’s economy, which expanded 8.8 percent in 2010, slowed in the first quarter as companies curtailed spending before the election. The government last month cut its 2011 growth forecast to 6.5 percent from 7.5 percent.

Consumer prices in May fell 0.02 percent from April and annual inflation slowed to 3.07 percent from 3.34 percent. An easing of government spending growth and increases in the benchmark rate have helped tame inflation, Benavides said June 7.

The president-elect needs to send signals about ministerial appointments and future policies to reassure companies, many of which have placed investment projects on hold, said Pedro Olaechea, president of the National Society of Industries.

“Some companies have decided to continue but others are waiting for signs on whether to keep investing or not,” Olaechea said in an interview in Lima yesterday. “It doesn’t make sense to raise rates because of the fall in economic activity.”

Central bank policy makers will keep the benchmark rate on hold until the outlook for growth is clearer, Barclays Capital Inc. said in a June 6 note to clients.

--Editors: Robert Jameson, Patrick Harrington

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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