Bloomberg News

Peru Unexpectedly Pauses After Humala Wins Election

June 09, 2011

(Updates with central bank statement in the third paragraph.)

June 9 (Bloomberg) -- Peru’s central bank unexpectedly paused for the first time in six months after investment into Latin America’s fastest growing economy slowed ahead of the June 5 presidential election won by Ollanta Humala.

The seven-member board kept the benchmark rate unchanged at 4.25 percent, surprising 12 of 17 economists surveyed by Bloomberg who expected a quarter-point increase. Five economists forecast a pause.

“This decision reflects the moderation in the pace of growth in consumer prices and some indictors of activity,” the central bank said in a statement posted on its website. “Future adjustments in the benchmark rate will depend on new information about inflation.”

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 Latin America’s fastest growing economy. The government last month cut its 2011 growth forecast to 6.5 percent from 7.5 percent as companies slowed spending before the election.

“Economic activity has really slowed down in the second quarter,” said Pedro Tuesta, a Washington-based Latin America economist at 4Cast Inc. “ You don’t know if the investment is coming back or how the market will react to the new government. There’s a lot of uncertainty,” said Tuesta, who accurately predicted today’s pause.

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.

The 48-year-old president-elect will follow the Brazilian government’s “successful” socio-economic policies to sustain region-beating growth and cut poverty with higher social spending, he told reporters in Brasilia today.

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

Investor View

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 system.

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.

Peru’s economy, which expanded 8.8 percent in 2010, slowed in the first quarter as companies curtailed spending before the election.

“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.

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.

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.

--With assistance from Helen Murphy in Bogota. Editor: Robert Jameson

To contact the reporter on this story: John Quigley in Lima at

To contact the editor responsible for this story: Joshua Goodman at

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