Bloomberg News

Peru’s Bonds Rise After Central Bank Unexpectedly Holds Rate

June 10, 2011

June 10 (Bloomberg) -- Peru’s sol-denominated bonds rose the most in 11 weeks after the central bank unexpectedly kept its benchmark rate unchanged for the first time in six months on a slowdown in growth ahead of the this month’s presidential elections.

The yield on the nation’s benchmark 7.84 percent sol- denominated bond due August 2020 fell six basis points, or 0.06 percentage point, to 6.50 percent, according to prices compiled by Bloomberg. The bond’s price rose 0.43 centimo to 109.19 centimos per sol, the highest since March 24.

“There is some re-pricing because people were expecting a hike,” said Roberto Melzi, a Latin America strategist at Barclays Capital Inc., in an phone interview from in New York. “There’s still is a lot of risk premium priced in that’s related to the elections.”

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

Economic growth in Peru slowed ahead of a victory in the June 5 presidential race by Ollanta Humala, a one-time ally of Venezuela’s Hugo Chavez. Finance Minister Ismael Benavides in a interview this week said policy makers had leeway to keep rates on hold as investors await “clear signals” from Humala on how he’ll manage South America’s sixth-biggest economy.

Investor Uncertainty

Since breaching the top of the central bank’s target range of 1 percent to 3 percent for the first time since mid-2009 in April, the annual inflation rate fell to 3.07 percent last month from 3.34 percent in April. An easing of government spending growth and increases in the benchmark rate has helped tame inflation, Benavides said. Prices in May fell 0.02 percent.

“There’s uncertainty about how quickly investment will pick up so it’s better to wait and see,” said Alonso Segura, head of investment strategy and research at Banco de Credito del Peru, the nation’s biggest bank. Policy makers “still need to raise once or twice more but they’re close to the end of the cycle,” he said.

After posting annual gross domestic product growth of 8.8 percent for 2010 and year-on-year growth of 10.2 percent in January, the government last month cut its 2011 growth forecast for to 6.5 percent from 7.5 percent.

Policy makers said in announcing their rate decision that it “reflects the moderation in the pace of growth in consumer prices and some indictors of activity,” according to a statement on the central bank’s website. “Future adjustments in the benchmark rate will depend on new information about inflation.”

Stock Selloff

Factory output and demand for electricity and cement slowed in April as construction and manufacturing activity eased, the central bank research director Adrian Armas told reporters on a conference call from Lima today.

A cut in fuel tax the government announced yesterday will limit a rise in fuel prices this month to 5 percent, he said. Still, the falling cost of chicken and slower price growth in other products will result in “moderate” inflation this month, Armas said.

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.

Market View

Since the market’s plunge in the first day of trading following the election, the Lima general index staged a three- day rally, recovering most of its record plunge, while Peru’s bonds, and sol currency rebounded.

The sol traded at 2.7615 per U.S. dollar at today’s close, little changed from 2.7621 yesterday.

The bank’s rate “decision was likely influenced by the fact that Ollanta Humala clinched the presidential elections, as this event has generated a sour mood in the market and could have a negative impact on activity in coming quarters,” Citigroup Global Markets Inc. Latin America economist Camilo Gonzalez wrote in a research note e-mailed to investors.

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 this week.


In an interview with CNN’s Spanish-language channel on June 7, Humala said he is considering asking 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 aide 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 system.

Humala 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.”

Companies curtailed spending and hired fewer staff in April while the sale of cars slowed, wrote Francisco Grippa, an economist at Lima-based BBVA Banco Continental, in a note to clients yesterday.

“Private spending has eased amid a more uncertain environment tied to the change of government,” he said.

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

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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