Bloomberg News

Velarde Says Peru Rate Reflects CPI Outlook, Slower Growth

October 26, 2011

(Updates market prices in 10th paragraph.)

Oct. 26 (Bloomberg) -- Peru’s benchmark interest rate is in line with policy makers’ expectations for slower inflation and below-potential economic growth, central bank President Julio Velarde said.

Peru’s gross domestic product will probably expand 6.7 percent to 6.8 percent this year, Velarde said yesterday in an interview in Toronto. Though that’s faster than the bank forecast five weeks ago, it’s below the economy’s potential growth rate of 7.1 percent, Velarde said. In 2010, the country’s GDP expanded 8.8 percent.

Growth will be “slightly below” 6 percent in 2012, “depending on what happens in the world,” Velarde said. Concern about a global slowdown led the central bank to keep its benchmark rate unchanged at 4.25 percent for a fifth month on Oct. 6. Though the central bank isn’t anticipating a global recession, slower overseas demand has sparked a drop in the production of textiles for exports, Velarde said.

“There was a big drop in demand for textiles in July and August,” Velarde said. “We’re not sure if that’s recession or fear of recession. I believe it’s fear of recession.”

Latin America’s sixth-biggest economy expanded a faster- than-expected 7.5 percent in August from a year earlier on rising consumer demand and a recovery in business confidence following the June 5 presidential runoff.

The central bank on Sept. 17 had forecast GDP growth of 6.3 percent for 2011 and 5.8 percent for 2012.

‘Neutral Territory’

The central bank raised its benchmark rate five times between January and May as food and energy costs increased.

The bank’s effective policy rate is in “neutral territory” at around 4.75 percent when reserve requirements are taken into account, Velarde said. Policy makers meet next on Nov. 10.

The annual inflation rate rose to 3.73 percent in September, a two-year high. Inflation will remain above 3 percent this year and return to the central bank’s 1 percent to 3 percent target range next year as commodity prices ease, Velarde said.

The sol was unchanged at 2.7170 per dollar at today’s close. The yield on the nation’s benchmark 7.84 percent sol- denominated bond due August 2020 rose one basis point, or 0.01 percentage point, to 5.76 percent, according to prices compiled by Bloomberg.

The currency has gained 3.3 percent against the dollar this year, the fourth-best performance among 26 emerging market currencies tracked by Bloomberg.

Sol Value

The sol, which touched its strongest level in more than three years Oct. 24, is not far from its fundamental value, Velarde said. The central bank hasn’t bought dollars in the spot market this week because there hasn’t been volatility in the currency, he said.

President Ollanta Humala ratified Velarde as president of the central bank for a second five-year term Oct. 3 and named three directors to the bank’s seven-member board. Humala respects the bank’s independence “very strongly,” Velarde said.

“We’ve had hyperinflation,” he said. “When you’ve had hyperinflation, politicians tend to respect the autonomy of the central bank.”

The central bank board will consider whether to raise the limit on how much Peru’s private pension funds can invest overseas once Congress has appointed the remaining three directors, which will happen in the “coming weeks,” he said.

Velarde said he favors funds being allowed to invest in a wider range of domestic financial instruments before any increase in their investments overseas.

Peru’s Superintendency for Banking, Insurance and Pension Fund Administrators regulates what type of assets the funds can invest in and the central bank sets the operating limit on their investments abroad, which currently stands at 30 percent of their assets.

--Editors: Robert Jameson, Richard Jarvie, Philip Sanders

To contact the reporters on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net; 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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