Bloomberg News

Peru Keeps Rate at 4.25% for Fifth Month on Global Slowdown

October 06, 2011

(Updates with central bank comment in third, 22nd paragraphs.)

Oct. 6 (Bloomberg) -- Peru’s central bank left borrowing costs unchanged for a fifth month as the threat of recession in Europe and the U.S. outweighs concern about accelerating inflation.

The seven-member board, led by central bank President Julio Velarde, kept the overnight rate at 4.25 percent, matching the estimates of 17 of the 18 economists surveyed by Bloomberg. One analyst predicted a 0.25-point cut to 4 percent.

“The decision takes into account the slower growth being observed in some components of spending and production, as we as a heightening of global financial risks,” the bank said in a statement on its website announcing the decision. “The central bank will change its monetary policy stance if these trends continue.”

The threat of stagnation in Europe and the U.S. has dimmed the outlook for Peru’s commodity-dependent economy and led the government to announce what it has called “preventive” stimulus measures. Though the central bank has indicated it will cut rates if global risks intensify and domestic activity slows, rising prices and stronger-than-expected domestic growth indicate there’s no need for laxer policy yet, said Juan Pablo Fuentes, a Latin America economist at Moody’s Analytics Inc.

“There isn’t an urgent need for lower rates because the economy is growing and inflation is above target,” Fuentes said in a telephone interview from West Chester, Pennsylvania. “We should see a small rebound in growth in the second quarter of next year assuming there isn’t any bad news about the global economy.”

Politics, Global Outlook

The Andean nation is tapping its first fiscal surplus in three years to finance stimulus measures worth about $470 million as it seeks to reverse a decline in public infrastructure spending in the first half of this year.

The stimulus will become more “aggressive” should a global slowdown cause exports and company spending to ease, Finance Minister Miguel Castilla said Sept. 22.

The International Monetary Fund on Sept. 20 cut its 2011 growth forecast for Peru to 6.2 percent from 6.6 percent previously. Growth will slow to 5.6 percent next year, the Washington-based lender said.

The central bank’s latest survey shows companies are less optimistic about domestic demand and hiring prospects because the global outlook has darkened, said Carlos Durand, president of the Lima Chamber of Commerce, in a Sept. 27 interview.

Growth, Commodities

Investor caution on the global outlook and “political uncertainty” following Peru’s presidential election is affecting medium and long-term investment, Luis Castellanos, chief executive of Banco Internacional del Peru, told reporters Sept. 29. Demand for consumer loans remains “vigorous,” he said.

President Ollanta Humala on Oct. 3 confirmed Velarde’s appointment to serve a second five-year term, which Pedro Tuesta, a former Peruvian central bank analyst and current economist at 4Cast Inc. in Washington, said indicated policy continuity.

Growth in retail and services helped offset a slowdown in manufacturing and construction in July and fuelled a 6.5 percent rise in gross domestic product, beating analysts’ and the central bank’s expectations.

Cement demand rose for the first time in three months in August while electricity output climbed at the fastest annual pace in six months, which suggests growth is accelerating, Tuesta said.

Trade, China

Peru’s trade surplus will probably fall to $4.3 billion next year from $7.4 billion this year because of lower copper, zinc, gold and silver prices, Velarde said Oct. 4.

China’s growth will remain “strong” this year and next, which “will guarantee that the price of exports will remain relatively high,” he said.

Gross domestic product growth will slow to 5.7 percent in 2012 from 6.3 percent this year, according to the central bank.

Economic activity will slow in the next few months amid weaker construction and manufacturing output even though consumer demand remains “very strong” Velarde told congress Oct. 4. “In investment, there isn’t a lot of pessimism, but nor has there been such a strong recovery yet.” Investors “are waiting to see what will happen with the global outlook.”

Policy makers will probably give more weight to the fall- out from Europe’s debt crisis, which led global stocks and commodity prices to tumble since their last meeting, said Roberto Melzi, at strategist at Barclays Capital Inc. in New York.

“Risks to economic activity haven’t dissipated anywhere by any means,” said Melzi, who forecasts a 0.25-point rate cut today to be followed by similar cuts at the bank’s November and December meetings. “The global crisis is deepening.”

‘Monetary Policy Instruments’

Higher fuel costs pushed Peru’s consumer prices up 0.33 percent in September from 0.27 percent in August, driving the annual inflation rate to 3.73 percent, a two-year high. The central bank targets annual inflation in a range of 1 percent to 3 percent.

Monthly inflation may slow to close to zero before year-end as some prices reverse recent increases, Velarde said Sept. 16. The annual inflation rate will converge toward the central bank’s target range next year, he said.

“The board is monitoring the outlook for inflation and its determinants so that it can make future adjustments to monetary policy instruments in a fast and timely manner,” the bank said in its statement accompanying its decision.

Peru’s sol posted the steepest quarterly decline since 2008 in the July-through-September period as copper prices fell and concern about slowing world growth wiped $10 trillion from global equities.

The currency rose 0.5 percent today, capping its biggest two-day gain since May 12-13 as the European Central Bank took steps to shore up the euro area’s money market.

--Editors: Robert Jameson, Jonathan Roeder

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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